At today's cabinet meeting to approve the 2017-2018 state budget, Governor of the Bank of Israel Karnit Flug said that the government budget deficit targets had been raised even though the recent economic climate was contributing to higher tax revenues and a lower deficit.
Criticizing the Ministry of Finance, Flug said, "The deficit targets were raised, despite the fact that the current economic environment is actually contributing to higher tax revenues, and therefore to a lower deficit. The need to increase the deficit target is a result of a marked increase in government expenditures, far beyond the current expenditure ceiling, even though the ceiling was raised substantially just at the end of 2015."
Flug added, "The new deficit target is expected to lead to a moderate but prolonged increase in the debt to GDP ratio in the next few years, and exposes the economy to the risk of a significant increase in the deficit and in the debt-to-GDP ratio if macroeconomic developments are less positive, even slightly, than those that appear in the base scenario of the forecast upon which the budget was constructed. Moreover, some of the increase in tax revenues relies on outlier developments (a sharp increase in durable goods purchases, particularly vehicles, and a volume of real estate transactions that may turn out to be temporary). Such an increase of the deficit during a period in which the economy is close to full employment may make it more difficult for fiscal policy in the future to support economic activity precisely during periods when conditions may be less favorable."
Flug also commented during the meeting on the government's social policy, in particular the expected education budget cut, saying, "The composition of expenditures in the budget to a great extent reflects the government’s priorities, and obviously has considerable economic and social implications, particularly regarding the long-term growth capability of the economy. The current budget proposal includes restraint in spending on education. First, the social policy that has been acting in the past decade to encourage a transition from welfare to work actually supported the increase in employment, but its success in reducing inequality and poverty among population groups on the margins of society remains limited.
" A few weeks ago, the PIAAC survey was published, showing that a main reason for the difficulties of the weaker population groups in Israel is the low level of basic skills among Israeli citizens, particularly Arabs and young people in the ultra-Orthodox sector. In other words, the economic inequality with which we are all familiar is to a large extent a reflection of inequality in workers’ skills."
Flug further stated, "One of the prominent barriers to economic growth in the recent period is the lack of technological manpower at all levels. While technological training itself is not necessarily done within the education system, the acquisition of skills at early ages is a necessary condition for training high quality workers in these fields, and can only be based on an education system that is high-level and accessible to all."
Published by Globes [online], Israel business news - www.globes-online.com - on August 11, 2016
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