Assessment of the fiscal developments since the budget was approved and their effects on the expected fiscal path
v The measures adopted by the government within the framework of approving the budget for 2013 and 2014 strengthened the credibility of Israel’s fiscal policy, and contributed to an improvement of Israel’s standing in financial markets.
v The budget deficit in 2013 is expected to be less than 3.5 percent of GDP, markedly lower than the deficit target of 4.65 percent of GDP.
v The below-target deficit reflects expenditures lower than the approved budget, and high tax revenues, most of which were exceptionally large one-off revenues.
v The budget deficit in 2014 is expected to be similar to the target set in law, 3 percent of GDP.
v If the government’s proposal to cancel the income tax rate increase, which was set to come into effect in in the beginning of 2014, alongside a similar reduction in the expenditure ceiling, is accepted, the government is expected to meet the deficit target in 2014, but it will be more difficult to do so in following years.
v Meeting the declining deficit targets set in law for 2015–17 requires additional policy measures—increased taxes, or reduction of the expenditure ceiling and a corresponding contraction of the government’s expenditure programs—valued at 1 percent of GDP in 2015 and a cumulative more than 2 percent of GDP by 2017.
v If the adjustment of the budget required to meet the deficit target is carried out solely by reducing expenditures, primary civilian expenditure per capita will not increase until 2017, compared with its current level.
v Presenting fiscal data based on the new national accounting methodology adopted by the Central Bureau of Statistics highlights the extent to which Israel is characterized as a country with low public expenditure and tax burden. Based on the new calculations, as with the previous ones, the current general government deficit in Israel is high, compared with other countries.
Based on 2013 budget performance data to date, it appears that the deficit in the government budget this year will be smaller than 3.5 percent of GDP, much below the ceiling of 4.65 percent of GDP that was set when the budget was approved at the end of July. The lower than projected deficit reflects a combination of three components: expenditure below the approved expenditure ceiling due to partial execution of several budget sections, extraordinarily large—about NIS 6 billion—one-off tax receipts, and an increase in GDP estimates by the Central Bureau of Statistics which reduced the deficit to GDP ratio by approximately one-quarter of a percentage point. The deficit in 2014 is expected to be 3 percent of GDP, similar to the target set in law. The development of some of the expenditure items in the budget, notably interest payments, will apparently enable the government to meet the deficit target in 2014 despite the cancellation of the increase in income tax rates, which is expected to curtail revenues by NIS 3.7 billion.
An analysis of the expected path of the deficit and debt from 2015 and onward indicates that meeting the deficit targets set in law (the green line in the Figure) will ensure a continued decline in the debt to GDP ratio to 60 percent by 2020. It will thus contribute markedly to the credibility of Israel’s fiscal policy and to the reduction of the government’s interest expenses. With that, attaining these targets will require the government to carry out wide ranging policy steps in the coming years. The estimate of government expenditures in 2015 is NIS 5 billion greater than the expenditure ceiling set in law. This is based on the plans adopted to date, and relying on the assumption that from now until the beginning of 2015 the government will not approve additional plans with significant budgetary costs without reducing other expenses. This gap is expected to continue to expand in the following years. Furthermore, even if the government will reduce its planned expenses to the level mandated by the ceiling, additional steps will be required—additional taxes or an additional reduction of expenses—at a total of about NIS 5 billion in 2015, so that the deficit will be 2.5 percent of GDP, in accordance with the target set in law. In this scenario, too, the gaps widen in following years, since without the adjustment, the deficit is expected to remain set at a level of about 3 percent of GDP (the blue line in the figure), while the deficit targets decline each year. Against this background, the cancellation of the decision to raise income tax rates, as proposed by the government, will require decisions on alternative policy measures which will increase revenues or reduce government activities. In the survey it was found that, among other things, if it is decided to carry out the entire adjustment until 2017 without any increase in tax rates, real primary civilian expenditure per capita will not rise, compared with its current level.