Israel Bank opposes Netanyahu's plan to increase the defense budget over the next decade

Posted on Aug 23, 2018 by Ifi Reporter

Israel Bank opposes Netanyahu's plan to increase the defense budget over the next decade

The Bank of Israel published a fiscal review that analyzes the budgets of 2018 and 2019, and examines the correlation between the government's plans for the years 2020-2020, including the intention to increase the defense budget in the coming decade according to the growth in GDP. The review also deals with the expansion of the government's use of budgetary and extra-budgetary activities, against the background of the gap between the cost of the programs it adopts and the fiscal targets.
The budget deficit in 2017 was 1.9 percent of GDP, significantly below the deficit target of 2.9 percent, and the debt-to-GDP ratio fell to about 60 percent. This was the third consecutive year that the deficit was at this level. On the basis of the good performance of the budget, the S & P rating agency announced in early August that it would raise Israel's credit rating from A + to AA- the highest rating Israel has received to date. In the Agency's announcement of the increase in the rating, it notes to Israel the commitment shown by the various governments in Israel to amend the budget outline during periods of rapid growth in the deficit and an increase in the debt / GDP ratio.
The low deficit in 2017 was achieved thanks to revenues far higher than expected, mainly due to one-time receipts from profit sharing of companies that exploited a temporary tax benefit and the taxation of proceeds from the sale of a leading company. These one-time receipts offset the significant increase in expenditure - a rise of more than one percentage point in the share of public expenditure in GDP. As a result, the structural deficit expanded considerably, and the deficit minus one-time unforeseen revenues reached 2.9% of GDP.
In 2017, decisions were made that increased the budgetary needs in 2018 beyond the reserve approved at the end of 2016. Within the framework of the two-year budget, a cross-sectional cut of NIS 2 billion is required to maintain the budget framework for 2018. Given these adjustments, and in view of the economic and budgetary developments during the year, The budget deficit in 2018 is expected to be 2.9% of GDP, similar to the target.
In the 2019 budget, the government also increased the expenditure ceiling by a considerable rate (an addition of 3% beyond the permitted increase according to the total expenditure, which is more than NIS 11 billion), in order to meet the accumulation of commitments from previous years. This is in spite of the considerable permanent additions already made in previous budgets. As a result of the breach, the government also had to raise the deficit target once again from 2.5 percent of GDP to 2.9 percent, although the favorable macroeconomic environment supports a high level of tax receipts. Based on current forecasts and the Bank of Israel's tax model, the deficit in 2019 is expected to be similar to the new target, and the debt-to-GDP ratio will remain around its current level.
The break in the expenditure limit and the raising of the deficit target in the 2019 budget has been accompanied by a series of such changes in recent years, reflecting the gap between the cost of achieving the government's goals in social welfare and social security, and the expenditure level determined by the constraint.
• In 2017, the government budget deficit amounted to 2% of GDP, far below the target of 2.9% of GDP, and the public debt to GDP ratio fell to 60%. This was the third consecutive year that the deficit was at this level. These developments supported the reduction of the interest rate on government debt and constituted an important factor in improving Israel's credit rating by the S & P rating agency.
• The low deficit in 2017 was achieved due to unanticipated (net) unexpected revenues of NIS 12 billion; Excluding non-recurring income, the deficit reached 2.9% of GDP.
• In 2018 and 2019, the budget deficit is expected to grow to 2.9% of GDP, in line with the government target and similar to the deficit, less one-time revenues in 2017.
• As in previous budgets, the government increased the expenditure ceiling and the deficit ceiling by a considerable amount in 2019. While the expansion of expenditures has slightly narrowed the gap in the rate of civilian expenditure between Israel and the OECD average, the pressures stemming from its low level are reflected in decisions on additional expenditures that already implement the spending constraint for the next few years.
• The expenditure constraint and the path of the deficit have been raised repeatedly in recent years. This behavior undermines their effectiveness as anchors to the government's multi-year planning.
• In recent years, the use of state policy funding by the sale of State lands by the Israel Land Authority and the issue of bonds by government companies has increased, with the government spending being financed by the State, thereby excluding the expenditure and the deficit ceiling Setting priorities.
• The numerator (the multi-year control mechanism of the budget aggregates) is an important tool with the potential to increase budgetary transparency and improve the medium-term planning. However, since its introduction, the government has begun to use various accounting and legal approaches that significantly reduce its usefulness, such as: 1. Defining long-term plans as temporary; 2. Setting large-scale horizontal cuts in a number of years - without specifying which plans will be canceled; 3. Expanding the use of extra-budgetary expenditures financed by the sale of land, or the recording of such expenditures in the budget in arrears.
The Bank of Israel opposes the intention of the government and its head to increase the defense budget over the next decade, and says that the increase in GDP is not consistent with the budget deficit reduction plan, the government's decision to expand social services, welfare programs and infrastructure investments, and the government's preference not to raise tax rates. The Bank of Israel warns that if such a plan is adopted for defense spending, it must be defined as stable and transparent financing sources, and should clarify the adjustments made to the other aggregates.


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