The Bottom Line / How big is it really?
The rift between Finance Minister Silvan Shalom and the governor of the Bank of Israel, David Klein, is widening. Shalom says one thing and Klein says another.
The rift between Finance Minister Silvan Shalom and the governor of the Bank of Israel, David Klein, is widening. Shalom says one thing and Klein says another. Shalom talks about interest rates and a council of governors and Klein replies with budgets and deficits. Each beats on the others brow and the wall dividing them is getting higher every day.
Since Shalom presented a bill proposing a council of governors for the central bank and Klein's angry reaction, Shalom has stopped talking to, or consulting with, Klein, and that's too big a luxury for a finance minister. After all, we're talking about one country and one economy - during an emergency period.
Yesterday was the governor's turn to strike. He released a detailed document prepared by the central bank's research department, which stated that the budget deficit would deviate from the budget target by NIS 8-11 billion. Namely, instead of a budget deficit of 3 percent, the deficit will soar to 5 percent.
And because the budget deficit is the reason for the current "emergency plan," and because the deficit is what sets the rate of depreciation, the rate of inflation, Israel's rating in the world and even the interest rate, it would be prudent to examine just how we reached such a large deficit and how large it really is.
How did the deficit get so high?
The original deficit target for the 2002 budget was 1.5 percent of gross domestic product. But, because of the dire straits, Shalom raised the deficit to 2.4 percent of GDP. The new budget deficit, however, was backed by a growth forecast of 4 percent, but this was short lived.
In December, the treasury submitted a new budget which was authorized in February in which it reduced its growth forecast to 2 percent and increased the deficit to 3 percent of GDP.
But even this deficit didn't satisfy the treasury's appetite, and the deficit is set to increase again. In other words, from cut to cut, the deficit goes up. Under the emergency plan, the deficit will be increased to 3.8 percent of GDP - namely, NIS 18.2 billion - a dangerous level and above any accepted Western norm.
Is this the real deficit?
Not necessarily. Last year, part of the American aid was not transferred on schedule, aid estimated to be worth 0.5 percent of GDP. As a result, a deficit of 4.6 percent was registered last year, while the real economic deficit was 4.1 percent.
Therefore, 0.5 percent should be added to this year's budget. In other words, when the emergency economic plan talks of a 3.8 percent deficit, it isn't accurate. The real economic deficit is 4.3 percent on the optimistic assumption that the planned cuts are passed in full by the government and the Knesset.
Is this the real final deficit?
Not yet. We have a special way of measuring the burden of internal debt. We take into account only real interest and not nominal interest, contrary to the accepted practice in the West. Therefore, to make comparisons with the West, we need to add another 2 percent to the deficit, and then it reaches the frightening level of 6.3 percent.
Now have we reached the final deficit?
Not quite yet. In the West, standard practice is to count all provincial, municipal and local authority deficits, because in the end the state will have to finance all of these deficits. If we take this into account, we add another 0.5 percent to the deficit, pushing it up to a horrifying 6.8 percent - not the 3.8 percent that the government declared.
What's the problem with such a big deficit?
In the West, under extraordinary circumstances of urgent budgetary needs, deficits of up to 3 percent are acceptable, and therefore, such a large deviation is dangerous for Israel's status in the world. It could lead to Israel's credit rating being downgraded and, in turn, to an increase in interest rates demanded from it for loans overseas.
In Israel as well, financing such a large deficit will mean heavy pressure on the capital market, crowding out commercial companies from the capital market and an increase in long-term interest rates, which will lead to an increase in short-term rates. A large deficit also leads to inflation (in other words, wage depreciation) and an increase in the deficit of the balance of payments, and thus a depreciation in the value of the shekel.
The bottom line is that a deficit is a covert tax imposed on the public. A tax divided in an unequal and unplanned manner. It will lead to a fall in investments, a decline in the rate of growth and higher unemployment. It may well be hidden from the public, but its effect will be felt by all.
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