The Bank of Israel says that the government has created a huge and unprecedented NIS 6.4 billion hole in the 2012 budget - amounting to 0.7% of GDP. The figure appears in the Bank of Israel's Survey of Economic Developments for October-December 2011, published the day after the IMF's draft concluding statement of the 2012 Article IV Consultation Mission to Israel.
The Bank of Israel said that the fiscal breach was made without any declaration of intent to breach the budget by the government. The Bank of Israel calls on the government not to do it, in order to prevent damage to policy credibility. It says that, for decades, Israeli governments have not spent more than they committed to spend.
The Bank of Israel says that most of the unplanned spending is for financing the Trajtenberg Committee recommendations. "Following the decision in principal to adopt the recommendations of the Trajtenberg Committee, the government approved additions to the budget at the beginning of January in order to fund the recommendations, as well other decisions taken by the government and the Knesset since the approval of the biennial budget. These include the wage agreement reached with the high school teachers union and with the physicians, and the raising of the minimum wage. In addition, the government decided to increase the 2012 defense budget by NIS 3.5 billion."
Moreover, the NIS 6.4 billion hole "is in addition to various decisions that have already been made or are being discussed, which are also expected to raise government expenditure."
The Bank of Israel believes that the huge excess spending means that the usual administrative tools, such as budget underperformance by some ministries - a well-known Ministry of Finance trick - are useless. A large part of the state budget cannot be cut, because it is anchored in salary agreements or are debt repayments.
The Bank of Israel calls on the politicians to immediately state the sources for financing the unfunded outlays, and to avoid shoot-from-the-hip budget cuts. "On the basis of the necessary adjustments (i.e. budget cuts - A.F.) it seems that the backing of the political echelon for the measure is necessary. This is necessary… because such a large deviation should be reviewed from a broad perspective of priorities. A transparent discussion at the start of the year will enable ministries to make more effective decisions, and avoid operating on an arbitrary basis."
In the biennial budget, passed in 2010, the 2012 deficit target is 2% of GDP, but both the Bank of Israel and the Ministry of Finance predict that the deficit will exceed 3.4% of GDP. Nonetheless, the Ministry of Finance continues to assert that the higher deficit is due to lower tax revenues caused by the economic slowdown, not higher spending. The exploding expenditures are liable to deepen the deficit to the point of a loss of control by the government.
Published by Globes [online], Israel business news - www.globes-online.com - on February 14, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012