What should be paramount in the minds of Israel's budget managers - reining in government spending or reducing the national debt? The first model is Israel's practice and the second is Switzerland's. The International Monetary Fund thinks Jerusalem would do well to adopt it.
Israel's economic leaders from the Bank of Israel and treasury are therefore mulling whether to adopt that "Swiss model" of budget management whose target is shrinking the national debt. If they do, it would be instead of Israel's present tried and untrue model of slapping a strict cap (though the annual budget law) on the yearly increase in government spending. (That replaced a model of "reducing the government deficit").
At present, government spending may not increase by more than 1.7% a year, but as the IMF points out, that leaves no wiggle room in case of national emergency. Nor does the government have flexibility to use fiscal weapons to fight looming recession.
The IMF specifically advises Israel to adopt a budget-management model of reducing the long-term national debt to 60% of GDP by the year 2015. At present the national debt is equivalent to 80% of Israel's GDP. That model, explains the IMF, aims at the long term but gives the government more flexibility in the short term, and it can increase spending if economic slowdown threatens.
Naturally, there would be limits. In a working paper called "Should Israel Go Swiss?" the IMF analysts explain that similarly to the Swiss "debt brake," Israel should adopt an error-correction mechanism based on a theoretical account. If accumulated liabilities in the fictional account go beyond a certain boundary, say 2% of GDP, and the goal of reducing government debt is imperiled, then flexibility (and spending) must stop. The purpose of the error correction mechanism is to ensure that Israel will indeed reduce its debt to 60% of GDP by 2015.
Why by 2015, by the way? Because that's when Israel can expect its population to start aging fast, and that's when it will need the resources to pay for pensions and health care. It won't want to keep spending a fortune each year on servicing a mountain of debt.
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