OECD warns Israeli government not increase spending in a broad and a permanent way

The Organization for Economic Cooperation and Development (OECD), the organization of developed countries of which Israel is also a member, warns the Israeli government and recommends that it not increase government spending in a broad and permanent way, since such an increase may increase inflationary pressures and result in the need for a tightening of monetary policy, that is to say, Additional interest rate increases - this is what the organization's economists write in an updated global report published today (Tuesday). The organization also estimates that the level of interest in Israel will be higher in 2023 compared to estimates so far, and will reach 4.25 in mid-2023.
The OECD's report comes against the background of rising inflation all over the world and the steps taken by central banks to try to curb it through interest rate hikes. The organization's economists believe that the world economy will manage to escape recession next year, but the worst energy crisis since the 1970s will lead to a sharp slowdown, which will be particularly damaging in Europe.
Regarding Israel, the OECD predicts that the GDP will grow by 6.3% this year - a slightly higher rate compared to the forecasts of the Bank of Israel and the Treasury for a growth of about 6%. However, the OECD also agrees that growth will slow down in 2023 to 2.8%, and this is because the global slowdown will weaken international demand from countries with which Israel trades. Private consumption in Israel will also decrease and investments will be reduced. However, the organization predicts that growth will recover in 2024 to 3.4%.
The organization's forecast regarding inflation in Israel is slightly less optimistic. According to the OECD, inflation will reach 4.3% this year, will slow next year to 3.3%, but only in 2024 will it return to the Bank of Israel's target range (1%-3%) and drop to 2.2%.
The OECD presents a forecast for continued interest rate increases in Israel up to the level of 4.25% in the second quarter of 2023. According to the organization, the interest rate will remain at this level until after 2024. Such an interest rate increase may indeed lead to a slowdown in activity and the labor market becoming less "tight".
The most optimistic figure in the OECD's forecast regarding Israel was actually not overly highlighted in the report. This figure refers to the most important measure of Israel's financial stability - the ratio between Israel's government debt (not including additional debts of the public sector, such as local authorities) and the GDP While before the Corona crisis this ratio reached less than 60%, during the Corona period it jumped and reached more than 70% in 2020 due to the high debt collections to finance the Corona aid programs.
The OECD now estimates that already in 2022, against the background of the high tax collection from the capital and real estate market and the low deficit - which will reach only 0.2% of GDP in 2022 - Israel will return this year to a level of government debt-to-GDP ratio similar to that before the crisis, with only 61.8%. At this rate, according to the OECD, in 2024 the ratio between debt and GDP will drop to 57.4%.
One of the main risks to the forecasts is that the war in Europe will escalate, which may disrupt the plans. The OECD report also refers to declines in the markets, which created difficulty in financing high-tech companies, and also to forecasts for a slowdown in the rise in real estate prices and in general in the profitability of companies in the economy - steps that will lead to a decrease in the growth rate of the state's tax revenues.
Although the OECD ignores the political instability in Israel as well as the various announcements surrounding the establishment of the new government, the organization shows concern about policies that the new government may take in regards to increasing public spending. The OECD warns that fiscal policy should remain "tight" due to inflationary pressures, otherwise - if the government increases spending - it will be necessary to raise interest rates sharply.
The OECD estimates that various fiscal measures taken in Israel so far to reduce the increase in the cost of living, for example the expansion of the income tax credit for families or reductions in the excise tax on coal and fuel, will indeed be extended in 2023, but most of them will be canceled in 2024. According to 0ECD, the total cost of these measures reaches 0.7% of the domestic product - that is, more than NIS 10 billion per year. The organization continues to recommend that the policy to help deal with the cost of living should be temporary and focused, and on the other hand the Bank of Israel should continue to tighten monetary policy and raise interest rates.
The OECD's warning comes at a time when the next government is formulating its policy in the coalition negotiations. Incoming Prime Minister Benjamin Netanyahu's statements before the elections included an intention to freeze the prices of electricity, water, fuel and property taxes with government funding, and at the same time introduce free education from the age of 0. The demands of the coalition partners are also high - increasing allowances for members of yeshiva, increasing the funding of ultra-orthodox education and more. In the background there is also the framework agreement with the Histadrut which may significantly increase government spending. Treasury estimates are that the total expenditure in Israel may reach tens of billions of shekels per year.
The actions of the outgoing government are praised by OECD economists, especially the recent reforms to increase imports by reducing barriers and lowering the unique regulation that prevented imports.
In the latest forecast published by the organization, it predicts that the growth rate of the global economy will slow from 3.1% this year to 2.2% in 2023, before accelerating again to 2.7% in 2024. This is a slight increase compared to the previous forecast.
"Our main scenario is not a global recession, but a significant slowdown in the growth of the global economy in 2023, as well as inflation that will continue to be high, despite the moderation of its rate, in many countries," said the organization's chief economist, Alvaro Santos Ferreira, in the forecast. In the shadow of the war in Ukraine , which caused severe disruptions in energy supply, especially to Europe, the organization called on countries to invest in energy security and diversification of energy supply sources. The report also states that investments in renewable energy should be encouraged.