​Summary:

  • The budget deficit excluding credit extended rose in 2008 to exceed the upper limit of the target, and the general government’s deficit, which is measured in accordance with National Accounts definitions, was 2.4 percent of GDP, compared with 0.2 percent in 2007. The increase in the deficit this year was due to a steep fall in tax revenues.  
  • After the sharp drop in the public-sector debt/GDP ratio in 2007, its rate of decline slowed in 2008, and the debt reached 78 percent of GDP. This was the result primarily of the stability of the exchange rate in relation to its rise in 2007 and the marked expansion of the budget deficit. This ratio remained higher than the accepted rate in the developed countries, but its contraction in recent years has significantly narrowed the gap.  
  • The tax/GDP ratio fell by 2.6 percentage points in 2008—about 1 percentage point of it due to tax cuts—to stand at 33.9 percent. Revenues were substantially lower than forecasts made at the beginning of the year, mainly because of the impact of developments in the capital market. Israel’s tax/GDP ratio is currently lower than those of most of the developed countries, as is the tax rate on wages. The progressive nature of taxes on wages has declined and has begun to approach the rate accepted in the developed countries.  
  • The public expenditure/GDP ratio, which has declined consistently since 2002, continued to contract by a similar rate in 2008, to reach 43.3 percent—placing Israel at the midpoint of the distribution of developed countries, after being at the top of the distribution at the beginning of the decade.  
  • The budget was fully utilized in 2008—the result of extensive under-utilization from the middle of the year and the fact that a large part of budget expenditure was brought forward in December.  
  • Because of the global economic crisis, its influence on Israel, and expectations that it will persist in 2009, the government’s objectives in the next few years are to ease the slowdown and prevent the ongoing damage which it could inflict on the economy, minimizing the impact on the weaker segments of the population, and creating the infrastructure for sustainable future growth. The credibility the government has acquired in recent years—reflected in the moderate rise in the yield on government bonds—enables it to allow the automatic stabilizers to work, as well as to even stimulate economic activity to some extent.  
  • If the crisis develops in accordance with current predictions, the debt/GDP ratio is expected to grow in the next two years. The extent and duration of this trend depends on the fiscal policy which the government adopts: a fiscal rule based on increasing expenditure in accordance with the current upper limit will enable the debt/GDP ratio to begin declining in 2011, and if the slowdown is more protracted than forecast, in 2012. This policy, together with its advantages in the financing sphere, will require decisions to be made about marked reductions in the expenditure path to which the government has committed itself in the next few years, making a very small increase in civilian expenditure possible.  
  • A policy of increasing expenditure in line with the long-term plans adopted by the government, without reducing other expenditure or increasing taxes, will obviate returning to the declining debt/GDP path in the next few years, and will even lead to its discontinuation, especially if the crisis deepens or lasts longer than expected. As a result, the burden of future debt-servicing payments and Israel’s risk premium are liable to rise. 


General Government, its Output and its Financing - Full File