The Ministry of Finance is considering emergency measures to encourage growth that will allow deviations from the permitted spending ceiling and help close the gap created in the state budget. The growth issue is the focus of disputes between the Ministry of Finance budget department, which has warned against increasing the budget deficit target from 2.5% to 2.8%, and the prime minister and accountant general, who believe that a 0.3% increase in the budget deficit should be allowed in order to increase growth-encouraging spending.
Senior Ministry of Finance officials attended a meeting with Prime Minister Benjamin Netanyahu last Wednesday in order to present him with the main points of the two-year budget for 2017-2018. The meeting was overshadowed by the disappointing growth figures for the first quarter showing a drop to 0.8% in the annualized growth rate (while the forecast for 2016 is 2.8-2.9%) and a warning note by leading credit rating agency Moody's following those data.
A growth rate of less than 1.8% means negative per capita growth, leading to calls by Manufacturers Association of Israel president Shraga Brosh and economist Dr. Zeev Rotem at the Hurwitz Conference for the declaration of an emergency plan to encourage growth. Moody's, which called the figures an event that "would imperil the continued improvement in the government's debt metrics," refrained from altering its credit rating for Israel, but the announcement can be interpreted as preparation for a dramatic step. For example, Moody's noted in its announcement that the Israeli economy has been weak since mid-2012.
In view of the figures, the prime minister spoke of the need to encourage growth in the economy with measures such as increasing infrastructure investments and increasing the Ministry of Economy and Industry Chief Scientist's R&D budget. Ministry of Finance budget director Amir Levy, on the other hand, argued for the importance of maintaining budgetary restraint, and mentioned concern about a reversal of the downtrend in the ratio of government debt to GDP, regarded by the credit rating agencies as the principal strong point of the Israeli economy. Accountant General Michal Abadi-Boiangiu, who is responsible for professional management of the state debt, said that increasing the budget deficit to 2.8% would not worsen the ratio of debt to GDP.
Underlying the budget department's position is a large gap created in the 2017 budget. According to the 2017 budgetary frameworks, a deviation of less than NIS 10 billion was expected, which is actually NIS 15 billion, composed of a deviation of almost NIS 11 billion from the legal spending ceiling and NIS 4 billion from the deficit target. Ministry of Finance sources predicted that "magic would be needed" to close this gap. One of the ideas raised was a one-time spending item due to an external event that would not be "counted" as part of the legal spending ceiling. In the past, such items were introduced following a war or severe economic crisis. This time, the idea is being raised to encourage growth.
Published by Globes [online], Israel business news - www.globes-online.com - on May 29, 2016
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