Main points of the Governor’s remarks at the cabinet meeting on the State budget for 2021-2022
2. The Israeli and global economies have been recovering from the COVID-19 crisis in recent months, and the employment rate in Israel has increased markedly in that time. However, the path of the recovery is not smooth, epidemiological developments are causing temporary slowdowns in the recovery and the rate of return to work, and there is tremendous variance between countries. Moreover, the recovery is still reliant upon accommodative monetary policy and expansionary fiscal policy, and the pace of their return to normalcy must take these risks into account. In Israel, the recovery relies to a great extent on the economic boom in the high-tech industry and its reflection in the global capital markets—which contributes a great deal to the current growth of tax revenue. We must take into account the risk that, as usual in the financial markets, these trends will be halted, and may perhaps reverse themselves.
3. The exit from the crisis is being accompanied in most advanced economies, by an increase in inflation. The increase in inflation both abroad and in Israel is considered at this stage to be temporary, and there is no expectation of restraint in the short term. In Israel as well, the Bank of Israel Monetary Committee noted that it does not see the recent price increases as a risk of an inflationary outbreak, and that monetary policy will continue to support activity in the foreseeable future. This environment enables the government to continue reducing the support mechanisms that it activated during the COVID-19 crisis and that are not currently necessary—as reflected in the proposed budgetary policy.
4. The proposed deficit target of 3.9 percent of GDP in 2022 is in line with the current macroeconomic environment and the characteristics of the fiscal outline that the Bank of Israel recommended to the government last year. Since, according to assessments by the Bank of Israel and the Ministry of Finance, the economy is expected to return by the end of 2022 to around the GDP path that was expected prior to the crisis, we must also converge to the structural deficit level that existed prior to the crisis—about 4 percent of GDP. In parallel, in view of the risks to the recovery, it is good that the government is neither reducing nor increasing the structural deficit in the current budget. However, it is important to be aware of the need to reduce the structural deficit starting with the 2023 budget, in order to avoid having the debt to GDP ratio grow out of control and to enable the large additional investments that are necessary in infrastructure and human capital in order to narrow the productivity gaps between Israel and the other advanced economies. It is therefore important in these budget discussions to avoid creating budgetary commitments for future years that will increase permanent expenditures that are not within the framework of investments that support growth. I will get back to this issue later on.
5. The tax revenue forecast included in the budget is similar to that of the Bank of Israel. The sharp increase in revenue reflects the rapid recovery of the economy—partly thanks to the large expenditure to support businesses and households during the crisis—and the trends in the global capital markets. However, the recovery also contains a trapped demand component that is expected in our assessment to moderate following the opening of the economy. This is a risk of which we must be aware, particularly looking at 2022 and beyond. The budget forecast does this appropriately, since we must not base ourselves on expectations of continued growth at the current pace, which reflects the unique situation of exiting from the crisis. In the same way, we did not lower the mid-range revenue forecast during the crisis.
6. The measures accompanying the budget should increase government revenues by NIS 1 billion in 2022. Some of the measures have the potential to contribute on their own, while others can streamline the activity of the tax system. However, it is desirable to remain conservative in assessing receipts from new taxes and changes in collection procedures, since these are hard to forecast—including the timing of when they will take effect. In particular, past experience in Israel and abroad shows that “deepening collection” as a result of administrative measures sometimes remains illusory.
7. Alongside the budget, there is a long list of structural measures and reforms before you. The Bank of Israel welcomes most of these reforms, which are in line with our recommendations in the economic strategy document presented to the government upon its formation. The implementation of measures in the areas of advancing infrastructure, construction and urban renewal, reducing the regulatory burden in the economy and adoption of international regulation, opening the economy to international competition and streamlining and expanding professional training programs will make a tremendous contribution to high and sustainable economic growth. Alongside this, it will be important to soon add processes that will contribute to improving achievements in the education system and to make high-quality education accessible from early childhood through higher education, particularly for weaker population groups.
8. Many of the required investments in the economy that are being driven by the economic program have low budgetary costs at the current stage—which is the launching and planning stage—but their implementation will in the future require significant budgetary outlay. It is important that the government prepare for these expenditures by reducing the structural deficit in the coming budgets from its current level, adopting an expenditure ceiling that will enable their performance, and adopting measures to increase revenue and moderate the increase in other expenditures, which will make it possible to make these investments in the coming years without the debt to GDP ratio growing out of control. Detailed analyses by the Bank of Israel show that even if the investments are high-quality and well-specified, most of them will need to be financed by measures to increase government revenue or moderate the increase of expenditures, in order to prevent a dangerous increase in the debt to GDP ratio. Only a small portion of them will be financed through an increase in the deficit—to a level that will not exceed the level planned for 2022.
9. The establishment of a Metro system in Gush Dan is a critical strategic process to advance the development of Israel’s economic and business center, drive urban renewal processes, and increase the supply of housing in the center of the country. The national preparedness program included in the draft decisions being discussed today includes many of the processes necessary to advance the development of the Metro as quickly as possible. It is very important to advance the process, even if various adjustments are necessary before the legislation is complete, since the path from approval of the program and the law to detailed planning, construction work, and the start of operations is still very long. It is desirable to involve the local authorities in the process as much as possible, in order to strengthen their support of the process and to give weight to the insights gained from the field. In order to ensure the pace of progress, it is important to examine the proposed financing mechanism and to make sure that the stipulations appearing in it do not become a barrier to progress of the development and construction work on the project. Significant timing gaps are expected between the various income sources mentioned in the program, and it is important that even if some of them are delayed, it will not delay progress in construction. These timing gaps will also make it difficult to assess in advance the receipts that will come from the various sources. We must make sure now that the itemized financing mechanism not become a barrier to progress in the project for cash flow and budgetary reasons.
10. The proposed increase in the retirement age for women will—according to a Bank of Israel analysis—make it possible to improve the National Insurance Institute’s resilience over time without increasing premia. Based on past experience that is documented in studies by the Bank of Israel, the process will also contribute to an increase in women’s employment at the relevant ages, as well as at ages below the stipulated retirement age. These are important processes in view of the increasing life expectancy, and they are also in line with what is happening in almost all other advanced economies. It is important that the proposed increase be gradual, in order to enable the women affected by it to prepared. It is no less important to guide the process with measures that will support the income of women who will be significantly impacted by the delay in their “senior citizen’s” pension—mainly those with low incomes or those who will be exiting the labor force. In addition, it is important to significantly expand the government-budgeted professional training programs for the elderly population—for instance those aged 50 and above—in order to enable older individuals to adapt their skills, and perhaps even their place of employment, to an extended career.
11. The proposed process to gradually cancel earmarked bonds in the pension funds and replace them with government commitments should lead to significant savings in the government’s budgetary expenditure relative to the current mechanism. However, it is important that the proposed financial process be accompanied by sufficient collateral that when needed—apparently during a crisis in the markets—the government will actually provide the necessary amounts to reimburse savers. Creating a financial instrument—retirees’ bonds—that will anchor the government’s commitment, will increase certainty for savers, since it may enable the success of the program. Such success will be measured not only by its budgetary savings, but also by the sense of security of savers in the pension funds. In parallel, the government will be able to allocate the necessary amounts to the dedicated account according to risk assessments that the Accountant General will carry out. It is worth noting that the Bank of Israel did not receive the necessary data for calculating the risks of the outline in time to provide a more detailed response right now, but we will be pleased to make ourselves available to the relevant entities for this purpose.