Israel hits its 2014 deficit target despite Gaza war

Change in GDP methodology helped keep deficit at bay.

THE TEL AVIV skyline (photo credit: REUTERS)
THE TEL AVIV skyline
(photo credit: REUTERS)
The government’s 2014 deficit, a statistic that will likely sail a thousand campaign slogans, was lower than the original target, coming in at 2.8 percent of GDP, the Finance Ministry revealed on Tuesday.
The deficit was NIS 1.2 billion below the NIS 31.1b planned for the year, a fact former finance minister Yair Lapid, the chairman of Yesh Atid, is likely to crow about in the run-up to March’s election. Just before the January 2013 election that installed Lapid in the Treasury, voters were incensed that the 2012 deficit was more than double its original target.
The lower-than-expected deficit for 2014, according to the Finance Ministry, resulted from an update in how the nation’s GDP is calculated (which lopped 0.1% of GDP off the deficit) and lower-thanplanned spending (another 0.2% of GDP), which were tempered by lower-than-expected revenues (which put 0.1% of GDP back onto the deficit).
Though the original budget set the 2014 deficit at 3% of GDP, which was projected at the time to be NIS 1,037.8b, the latest estimation of GDP for the year put it significantly higher, at NIS 1,087.9b. The increase was not because Israel’s economy grew more than expected (quite the opposite, in fact), but because the Central Bureau of Statistics implemented a new method for calculating GDP.
On the tax and spending side, the budgetary changes were a result of Operation Protective Edge, last summer’s war with Hamas in the Gaza Strip.
Tax revenues fell as a result of the war, which shaved 0.3% off economic growth for the year. The Defense Ministry, meanwhile, demanded more funds. Lapid responded with an across-the-board 2% slash to all the government offices (save Defense) to keep the deficit roughly in line.
He also pushed some of the costs into the 2015 state budget, and raised the deficit target for that year in excess of the Bank of Israel’s recommendations.
That controversial budget never passed, and was at the center of the coalition crisis that felled the government in December and opened the door to the upcoming election. The political instability surrounding economic policy led to warning by credit ratings agencies such as Moody’s, which termed the early election “credit negative.”
The failure to pass Lapid’s draft 2015 state budget and its inflated 3.4% deficit will likely lead to a lower deficit in the coming year, as the government reverts to a month-to-month formulation of the 2014 budget until a new budget is approved after the election.