War costs to halt deficit reductions [p. 17]

The Bank of Israel warned Tuesday that heavy government spending to finance the conflict in the North was expected to halt in the second-half of the year what had been a downward path in the government deficit. "The fighting in the North and the heavy expenditure to finance it are expected to increase the government's need for financing in the second half of the year, which is likely to halt the trend of continued reductions in the debt/GDP ratio," the central bank said in its monthly government debt report for June. The Bank of Israel cautioned that the ratio of gross government debt to GDP was considered by foreign investors to be an important index of an economy's stability, and played an important role in a country's rating by the international rating agencies. "The ratio affects the state's accessibility to the international capital markets, the cost of raising funds in these markets and the burden of interest payments on the debt. Hence the importance of the debt ratio as against the background of the cost of the war in the north," the bank said. Total government debt in June 2006 was NIS 540 billion, which drops the ratio to 89% from the 95% level at the end of 2005 and 99% at the end of 2004. "This is the first reduction in debt since 2000, and takes place against the background of the government's lower need for financing due to a sharp reduction in the deficit, continued proceeds from privatization and increase in tax revenues due to strong economic growth," the bank noted. Despite the reduction in the debt/GDP ratio over the past two years, Israel's rate was still higher than in most developed countries, the central bank added. Meanwhile, Finance Minister Avraham Hirchson announced on Tuesday that the rehabilitation plan for the North would be approved by the beginning of September. "Within the framework of the plan, budgets in 2007 will be diverted to serve this purpose," Hirchson said. Hirchson added that the Finance Ministry had transferred NIS 250 million to local authorities in the North.