Bank of Israel Governor Dr. Karnit Flug accuses the Ministry of Finance of using questionable accounting methods in an attempt to artificially lower the reported budget deficit. Estimates suggest that the real deficit target for the 2016 budget may be half a percent higher than the figure reported by the ministry.
Flug appeared, in her role as an economic advisor to the government, before a Cabinet session on Sunday to brief the ministers ahead of a critical session on the state budget, expected on Wednesday.
The governor's criticism focused on central principles related to the budget since its parameters the deficit target and the size of the final budget had yet to be determined before Flug's comments.
Her central argument was the importance of maintaining the country's credibility in the financial sector; she said the Bank of Israel has already internalized the need to raise the deficit target beyond the rate set in the law for 2016 2%.
Finance Minister Moshe Kahlon (Kulanu) agreed with Prime Minister Benjamin Netanyahu that the deficit target would be 2.9% but Flug warned that any increase over 2.5% will stop the decade-long, successful process of reducing the debt-to-GDP ratio.
She claimed a target of 2.9% would lead to an increase in the ratio and waste the credit that successive Israeli governments earned with global markets due to their reliable and responsible budgeting. Flug further warned that such a change could have serious implications on Israel's credit rating and the interest rate the market demands for issuing its bonds.
In the second part of her remarks to the Cabinet, Flug focused on how the government could stick to the deficit target required. According to Bank of Israel estimates, the Ministry of Finance would need to cut NIS 15 billion to achieve the target and that's under the assumption the defense budget remains at NIS 59 billion for 2016 and the coalition agreements for 2016 do not pass the NIS 8 billion mark.
As is customary for Bank of Israel governors, Flug avoided calling for cuts to the defense budget but noted that Israel's military expenditures reached 5.8% of GDP in 2014 four times more than the average for developed countries.
Published by Globes [online], Israel business news - www.globes-online.com - on August 2, 2015
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