Summary:

  • The general-government deficit fell from 5.3 percent of GDP in 2009 to 3.8 percent in 2010 as tax collection grew more quickly than GDP and outpaced the budget outlook while general-government expenditure increased at roughly the pace of GDP.
  • The government budget deficit dropped to 3.7 percent of GDP, 1.8 percent of GDP under the ceiling established in law.
  • The decrease in the deficit and the rapid growth in 2010 lowered the debt/GDP ratio to 76.2 percent, 3 percent of GDP under the 2009 level—in contrast to the situation in most OECD countries, where large deficits pushed the ratio up considerably to an average of 84 percent.
  • The reduction of the deficit to below its target and the lowering of the debt/GDP ratio in accordance with the economic recovery did much to enhance the stability of the economy and served as an anchor for a pro-activity monetary policy.
  • The current level of the deficit is too high to allow the debt/GDP ratio to continue falling in accordance with the government’s targets once GDP growth returns to its multiannual pace.
  • The government adopted a new fiscal rule in 2010 that placed the deficit for coming years on a declining path and set the expenditure ceiling higher than the previous fiscal rule had permitted.
  • It will be quite a challenge for the government to meet its deficit- and debt-reduction targets in coming years. Civilian public expenditure net of interest is already low by the standards of developed countries; this has implications for the extent of public services and that crimps the ability to reduce it. Furthermore, the potential increase in revenues is limited by the proximity of the economy to its potential GDP and legislation that envisages major continuing tax cuts from 2013 onward.
  • The decrease in the debt/GDP ratio in 2010 was abetted by privatization receipts that provided more than half of the deficit financing; by payback of credit taken by the public; and by the use of some of the government’s issuing surplus in 2009. The share of short-term bonds in government issues increased in 2010 as the government took advantage of low cost at the short end of the yield curve, at the price of an increase in future risks.
  • Public consumption increased somewhat more quickly than potential product, whereas amendments to tax legislation hardly affected net revenue at all. Thus, fiscal policy in 2010 made a direct if minor contribution to the expansion of economic activity—in contrast to the much greater contribution in 2007 and 2008, which was based on the lowering of tax rates.
  • The reductions in tax rates on wages in recent years made it possible to increase net wages with no change in employers’ wage costs, thereby supporting employment and growth.
  • Due to the inelasticity of private-vehicle use and the lack of adequate public transportation in Israel, environmental taxes on motor vehicles and fuel provide the government with a significant source of revenue but do not mitigate the negative externalities of vehicle use.
  • The compulsory-pension arrangement is having adverse effects on many low-income workers and is expected to reduce state tax revenue by more than NIS 1 billion per year—more than three times the future saving on National Insurance benefits that it will attain.