The Bank of Israel today published its fiscal survey analyzing the current fiscal stance in Israel and its medium- and long-term implications for fiscal aggregates. It highlights the urgency of legislating a budget for 2021 and lists the principles according to which fiscal policy should be designed in view of the vast uncertainty embedded in the macroeconomic forecast.


  • The Israeli economy entered the COVID-19 crisis with a low debt to GDP ratio, but also with a high structural deficit, which has grown persistently since 2015 and will lead to a prolonged increase in the debt ratio even when the crisis ends.
  • During 2020, the government approved a comprehensive temporary safety net for businesses and for workers. Its actual cost in 2021 will depend on the state of the economy and of morbidity.
  • Uncertainty regarding the evolution of morbidity and its effect on economic activity in the first half of 2021 creates large variance in estimates of the deficit, debt, and unemployment for the next two years, which in turn has a large effect on the path of debt in the years thereafter and on the preferred policy outline following 2021.
  • The fiscal forecast is based on two macroeconomic scenarios compiled by the Research Department, which were published in October 2020, with slight modifications reflecting data revisions since the publication, particularly to the Central Bureau of Statistics  National Accounts estimates for the third quarter. These modifications brought the 2020 growth forecast more in line with the “high control of morbidity scenario”, but their effect on the forecasts for the coming years is not significant.
  • A return to a declining path of the debt to GDP ratio is desired, and may enhance market confidence, but will require significant fiscal consolidation which, if enacted prematurely, may have an adverse impact on the recovery from the crisis while the unemployment rate and the output gap are still high.
  • In order to avoid unplanned fiscal restraint and the limitations and planning difficulties resulting from operating with an interim budget, it is recommended that the budget for 2021 be approved soon. In view of the uncertainty it is also recommended that the following principles be adopted in the 2021 budget:

1.      “Ordinary” expenditures should be separated from expenditures resulting from dealing with the COVID-19 pandemic. The former shall be determined on the basis of the existing expenditure ceiling, while “COVID-19” expenditures shall be determined on the basis of the safety net and assistance budgets already approved. Increments will be issued only if an extension of the existing safety net is necessary due to the state of unemployment and economic activity.

2.      The government will avoid lowering tax rates without a parallel reduction in expenditures. The deficit will be derived from actual expenditures and revenues realized as a result of the economic situation.

3.      The government will avoid making adjustments to the budgets for the years following 2021, which are required according to the numerator rule, but will “block” new decisions increasing them.

4.      The multi-year budget framework for the years following 2021 will be determined only when approving the 2022 budget—in the summer of 2021.

5.      The 2022 budget will anchor a debt-reduction outline thorough an “adjusted expenditure” ceiling that sets out an over-all budget for increasing expenditures and changes in tax rates and enables substitution between them. This ceiling shall replace the existing expenditure ceiling.

  • A​ccelerating medium- and long-term growth in the economy requires significant investments in infrastructure and human capital, alongside reforms in regulation and in the public sector. The increase in the debt ratio highlights the need to finance a significant portion of the cost of these reforms through reducing other expenses, increasing tax rates, and eliminating tax exemptions.​