Treasury Budget Sees Faster Economic Growth in 2017-18

Spending package goes to Knesset amid warnings of dimmer outlook in longer term

 Finance Minister Moshe Kahlon, in October 2015.
Finance Minister Kahlon, in 2015. Moving to lower the huge exporters' corporate tax to an especially low 6 percent. Michal Fattal

The government formally presented the 2017-18 budget to the Knesset Wednesday, with short-term forecasts for faster economic growth in the next two years but warnings that the long-term outlook for the economy is dimmer.

Spending is slated to reach about 447 billion shekels ($136 billion) in 2017 and 460 billion in 2018, up from 414.6 billion this year and 380.9 billion in 2015, the treasury said.

The Knesset has until the end of December to approve the budget, although debate could continue through the end of March before the government is at risk of falling. Prime Minister Benjamin Netanyahu pushed for a two-year budget over the objections of treasury officials to save the government wrenching budget debates in 2016 and 2017.

The biggest item by far is defense, whose budget is set at more than 70 billion shekels for each of the two years. Education comes next with allocations at 52.9 billion shekels in 2017, with another 10.5 billion for higher education. Spending on health will be 33.1 billion shekels and 24.6 billion shekels is slated for infrastructure.

However, debt repayment will add up to 51 billion shekels next year, nearly as much as the government is spending on education. That said, the budget deficit is expected to be a relatively low 2.9% of gross domestic product in 2017 and 2018.

One reason for that is that the treasury is expecting tax revenues to mark another two years of strong growth after rising at twice the rate of economic growth in 2015 and the first half of 2016. In 2017, they are expected to climb to 294 billion shekels, compared with 278 billion this year – a figure that has been revised upward several times. In 2018 tax revenues will break the 300-million-shekel mark, the treasury forecasts.

The treasury is counting on economic growth accelerating over 2017 and 2018 to 2.7% and 2.8%, respectively, after an expected 2.5% in 2016. However, growth in consumer spending, which has been the engine of the economy and for much of the big rise in collections, is expected to moderate: Treasury economists predict it will grow 4.8% this year, but slow to 3.3% in 2017 and 3.1% in 2018.

The treasury said Wednesday that even with a pick-up in growth next year and in 2018, the longer-term outlook is dimmer. Economic drivers like falling unemployment and a rising percentage of the adult population in the workforce, as well as a rise in educational levels, have largely been tapped out.

This week the Central Bureau of Statistics reported that unemployment in the third quarter fell to 4.7%, its lowest rate in decades. Israel has one of the world’s highest rates of people with a tertiary education, but enrolment in bachelor’s degree programs has fallen in two of the past three years.

The treasury also pointed to global development that will weigh on Israeli economic growth, among them a slowdown, or even decline, in global trade, which will undermine Israel’s export-oriented economy.

As a result, the Finance Ministry said, the gap in per-capita income between Israel and the wealthiest countries belonging to the Organization for Economic Cooperation and Development is likely to begin widening again. It also warned about rising income inequality and rising costs of living.

“The concentration of wealth by a small number is linked to the absence of competition in many sectors of the economy and the presence of monopolies, which impact on labor productivity and the ability to compete in international markets,” a treasury spokesperson said. “In addition, since 2007 business conditions in Israel have deteriorated and we are in the bottom quarter of OECD countries for this.”