Israeli economic results are continuing to set records, as the ratio of national debt to Gross Domestic Product (GDP) will drop at the end of 2007 to about 80-82 percent. It is even possible that the ratio will drop below 80 percent of GDP, if not this year, then in 2008.
This compares to an 87 percent ratio at the end of 2006, and over 100 percent in 2003.
The over 20 percent drop in under four years stems from two main causes: First, the large surpluses in tax revenues, about NIS 10-11 billion. The Finance Ministry intends on using part of this sum to reduce income tax on the middle classes as part of a package deal involving raising taxes on cars supplied by employers to their workers. However, Knesset foot-dragging on approving the higher car taxes has prevented the proposed income tax cuts. Therefore, almost all of the revenue surpluses will be used to replenish the state compensation fund that was emptied out as a result of the Second Lebanon War.
The second cause for the drop in the debt to GDP ratio is the sharp rise in economic growth - and total GDP - of more than 5 percent, a percent higher than expected at the start of 2007.
The lower ratio is one of Israel's most important economic goals, alongside eradicating inflation and cutting back on government spending. This lowers Israel's interest payments on its national debt, and allows the state to be better prepared to deal with economic hard times in the future.
Today, the state pays NIS 35 billion a year in interest on its debts. This should drop by around NIS 1 billion next year already, and more in the future. This also means more funds available for other spending, and will be available every year.
International rating agencies place enormous importance on the debt to GDP ratio in their considerations - and the drop over the past four years will certainly get their attention. There are great hopes in Jerusalem that in the next few months, for the first time since 1995, the ratings agencies will raise Israel's status.
However, despite the big improvement, Israel's debt ratio is still far from the average for developed nations. The OECD average is about 60 percent.
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