The deficit is fine, but what about inflation? - analysis

One of the primary battles being fought in Israel’s economic arena is the war on the increasing cost of living.

Finance Minister Avigdor Liberman checks food prices at a Jerusalem supermarket. (photo credit: Courtesy)
Finance Minister Avigdor Liberman checks food prices at a Jerusalem supermarket.
(photo credit: Courtesy)

Israel’s deficit has come a long way since the onset of the coronavirus pandemic. The State Comptroller’s Report on Tuesday presented data on the state’s expenditures from 2019 to the end of 2020, and the standout statistic is the massive spike in the country’s deficit, primarily brought on by COVID-19.

The onset of the pandemic led to an increase in the country’s deficit of approximately NIS 66 billion from 2019 to 2020, adding up to a total of NIS 236b., the report said. In light of this, the State Comptroller’s Office called upon the Finance Ministry to formulate a multiyear plan to “reduce the deficit to levels planned before the coronavirus crisis.”

The ministry has thus far delivered: As of this April, the deficit has returned to pre-pandemic numbers, and it even set a record low for the past decade.

Data from the report illustrates that Israel’s deficit leapt to relatively extreme heights in early 2020. For many years, the state maintained a ratio of around 3% deficit to GDP, which indicates a stronger economy capable of paying debts without incurring further debts. That number skyrocketed in 2020 to over 11%, representing the government’s stark reliance on foreign and domestic loans to bail out the pandemic economy.

In the intervening year and a half, however, the Finance Ministry has grappled with the deficit gap and made significant progress in lowering it. In March, the deficit reached a low of 1.4%, the lowest it had been since 2008; the deficit has since remained at around 1.5% – a staggering decrease compared with early in the pandemic.

INDEPENDENT BUSINESS owners and workers from the tourism sector call for financial support from the government, outside the Finance Ministry in the capital on June 30. (credit: YONATAN SINDEL/FLASH90)INDEPENDENT BUSINESS owners and workers from the tourism sector call for financial support from the government, outside the Finance Ministry in the capital on June 30. (credit: YONATAN SINDEL/FLASH90)

One of the primary battles being fought in Israel’s economic arena is the war on the increasing cost of living. Brought on mainly by global shortages and geopolitics, the rising costs of food, gasoline and utilities have been a frequent topic of discussion in the economy. From April 2021 to April 2022, the inflation rate in Israel has gradually climbed from a very manageable 0.8% to 4%, a five-fold increase in one year.

While that jump is relatively large, in the grand scheme of things, 4% isn’t uncontrollable. Speaking at the Jerusalem Post London Conference in March (when inflation was sitting at 3.5%), Bank of Israel Governor Amir Yaron said: “Inflation is going up everywhere, [but] Israel’s inflation is in the bottom 10% of inflation among the OECD. So it’s significantly less [than in other nations].”

Prof. Karnit Flug, vice president of the Israel Democracy Institute and a former Bank of Israel governor, echoed Yaron’s sentiment.

“Inflation has risen,” she said in an interview last month. “It’s much more modest than, for example, the US, which is at around 7%, and the average for OECD countries, which is close to 6%. But still, it’s a significant rise.”

The Finance Ministry has tried several methods to combat rising inflation, including tax relief, tariff abolition and government handouts. In addition, the Bank of Israel has increased the interest rate for the first time since 2018, from 0.1% to 0.35%, to push the economy toward stability.

Whether that effort will be fruitful is yet to be seen, but for the sake of pantries, gas tanks and water bills around the country, we can keep our fingers crossed.