Full paper · The government finished 2016 with a deficit of 2.1 percent of GDP, similar to 2015 and significantly lower than the deficit ceiling set in the budget. The public debt to GDP ratio declined to about 62 percent.
· The lower-than-targeted deficit reflected a) higher-than-expected tax receipts, which were a result of growth that was more rapid than expected, Israel’s improved terms of trade, and an exceptional increase in the import of vehicles—a highly taxed product; b) surpluses in National Insurance Institute activity that reflected over-estimation of benefit payments; and 3) expenditures that were somewhat lower than budgeted.
· The deficit ceiling for 2017 and 2018 was set at 2.9 percent of GDP, but it seems that the deficit will be lower in 2017, at about 2.5 percent of GDP, and that in 2018 it is also expected to be slightly below the ceiling.
· The lower-than-targeted deficit is supported by the economy's current near full employment environment, and by the marked contribution of tax receipts from the volatile real estate and vehicle markets—which increased by 0.8 percent of GDP between 2012 and 2016.
· Primary civilian expenditure in Israel is almost the lowest in the OECD, and makes it difficult for the government to allocate resources to policy measures that will entrench long-term economic growth. However, in the last two budgets, the government significantly increased its primary civilian expenditure so that its share of GDP is expected to increase by about one percent of GDP. This expansion reflects the decision to release the expenditure ceiling, both directly and indirectly, the only moderate increase in defense expenditure, and the decline in interest payments.
· According to the multi-year control mechanism over the budgetary aggregates (the “numerator”), the government must make sure that its decisions do not lead to a deviation from the expenditure and deficit ceilings even in the years following the current budget. At this stage, it appears that the mechanism has contributed to an improvement in budgetary discipline.
· Based on the decisions made thus far, the expected expenditure in 2019 is similar to the ceiling, but expenditure in 2020 is already expected to be at least NIS 4 billion higher than the ceiling. The expected deficit in those two years exceeds the ceiling set in the law, even assuming that the high level of economic activity is sustained.
· Since the expected deficit in the medium term is higher than the ceiling set by law, government decisions on tax reductions or increased expenditure that will permanently increase the deficit must be accompanied by measures that will offset the increase in the deficit.
· The low deficits of the past two years supported the decline in the debt-to-GDP ratio, but most of that decline in recent years reflected a rapid increase of the GDP deflator relative to the Consumer Price Index, the repayment of the public’s debts to the government, and receipts from land sales. Over time, one cannot assume that these sources will continue making significant contributions to the process of lowering the debt-to-GDP ratio.
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