The tax revenue report for 2008 released yesterday paints a gloomy picture of the government's future financial situation. The sharp drop in tax collection over the past few months from the business sector, the capital market, and from the general population too, which has stopped consuming, will only become steeper in 2009. The Ministry of Finance is already changes the assumptions that lay behind the budget for this year. What was put together in June 2008 for January 2009 is no longer relevant. Worse than that, the new budget proposal will not be implemented before May-June, after the elections, the formation of a new government, and the predictable coalition demands.
The growth assumption of 2-3% is the first thing to have become obsolete. The ministry is now talking about growth of 0-1.7% at best. This means the most optimistic projection is of zero growth in per capita GDP, given the rate of increase of the population, while the pessimistic projection is for zero growth altogether. The target for tax collections has been cut from NIS 190 billion in 2008 (which was not reached) to just NIS 160 billion for 2009. This is a drop of 15%. As a result, the Ministry of Finance knows that a fiscal deficit target of 5% is realistic, and even positive, given the worsening crisis in the global economy that has already penetrated the Israeli economy deeply.
Public debt will grow
One of the questions that remains open, and which raised fierce argument a few months ago, is the rate of increase in government spending. All the Ministry of Finance's assumptions, in the best budgets division tradition, on spending growth of 1.7% only, and not 3% as Knesset Finance Committee chair Avishay Braverman and his friends propose. "If that's the rate of spending growth, the deficit will jump to 7%, as in the US. That's a deficit that the Israeli economy cannot absorb," a senior Ministry of Finance official warns. But if we take into account the worsening recession, future activity in rehabilitating the south, and the fact that the next government will propose a grandiose stimulation package as governments have done in the US and Europe, a rate of 3% looks to be on the cards, despite what they say at the ministry.
This time, Ministry of Finance officials will find it much harder to persuade the public that they are in the right. There is no point in again wheeling out the story of "the need to reduce Israel's debt:GDP ratio, which is among the highest in the world", as they did last year. The debt will grow in the coming year, that is almost a fait accompli, and even the economists of the IMF wrote in their initial report on the Israeli economy that it was predictable, understood, and acceptable in the circumstances.
To finance the huge deficit, which is already starting to swell, money will have to be raised through bond issues, and the Ministry of Finance believes this will have to include issues overseas. They are already saying there that as a result of larger bond issues, the interest rates will rise. The ministry has also taken into account that Israel's sovereign credit rating may be cut, since the rating is currently as good as it has ever been, and the situation is not encouraging. This point however is of less concern to the ministry's top officials.
The great fear is that more government bonds, which are in high demand at present since the trend is to build defensive portfolios, are liable to squeeze out corporate bond offerings, and that, in the ministry's eyes, is the economy's Achilles' heel at present.
What is certain is that it will not be easy, and 2009 will demand of the Minister of Finance and the budgets division a high degree of creativity.
Published by Globes [online], Israel business news - www.globes.co.il - on January 14, 2009
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