Government by Numbers: Report Finds Big Rise in Spending, Massive Pension Obligations

Accountant general estimates key housing program cost taxpayers 5 billion shekels ($1.37 billion), as of March

New residential apartment blocks stand during construction in Jerusalem.
Ariel Jerozolimski/Bloomberg

Finance ministers and other politicians can say what they want about the job they are doing and what it is costing, but as the treasury’s accountant general, Rony Hizkiyahu, said when releasing the government’s 2017 financial report, it’s the data that tell the true story.

“Words can create different impressions, but numbers are reliable and they show the impact of changes over the short and the long term,” he wrote in the report.

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If so, it shows a government that has boosted spending enormously over the last several years but has still managed to keep its deficit under control. It has enormous pension obligations and faces a huge bill for increasing disability allowances, as new legislation promises. In addition, Israel holds billions of dollars in natural resources.

Here is a rundown of the report’s biggest numbers:

Government spending breakdown

The budget: Government spending grew 50% from 2010 to 2017 in nominal terms — from 202 billion shekels ($55.6 billion at current exchange rates) to 310 billion shekels. Civilian spending accounted for some 60% of the increase, despite recurring concerns about a ballooning defense budget.

In 2017, civilian spending rose one percentage point, to 19.3% of gross domestic product, while defense spending — despite concerns that it would exceed the budgeted amount — accounted for just 5.2%. The ratio of defense to civilian spending has remained stable for several years, at around 1:4.

Interest costs, meanwhile, dropped — from 3.1% of GDP in 2010 to 2.3% last year, thanks to low interest rates and a declining debt burden. The savings, according to the accountant general, enabled the government to spend 11 billion shekels last year on government activities.

Overall, last year government spending was equal to 28.4% of GDP, the highest since 2010. Revenue accounted for 26.4% of GDP, the highest since 2008.

The deficit: As a result, the budget deficit in 2017 was just 1.9% of GDP, declining for the fifth year in a row. It wasn’t so much that government overspending fell, rather that the Central Bureau of Statistics revised its estimate about the size of the Israeli economy.

In any case, most economists doubt the deficit will continue falling even relative to GDP. The target is 2.9% this year.

Revenues were given a big boost, amounting to 15 billion shekels last year, due to one-time factors, including 11 billion in taxes on dividends due to a one-time break the government gave on taxes and 4 billion from capital gains from the sale of big companies such as Mobileye and Keter Plastic.

Against that, the government pumped 4.2 billion shekels into a fund to cover costs from natural disasters or war.

>> Read more: Are Home Prices About to Explode Higher?

Machir L’Mishtaken: Finance Minister Moshe Kahlon’s flagship program for reining in housing prices cost the government some 5 billion shekels as of March of this year, the accountant general estimated. Most of that amount — 3.67 billion shekels — was for discounts on land marketed by the Israel Lands Authority to contractors, who are expected to pass along their savings to home buyers.

Another 610 million shekels went to subsidies to contractors and 749 million shekels for grants to home buyers under the program. With about 43,000 Israelis entitled to enter lotteries for a chance to buy a home through the program, the government aid works out to 116,000 shekels per home.

Despite the benefits being offered, the accountant general’s report found that 40% of the land auctions held under Machir L’Mishtaken attracted no bid from builders. On the buying side, 23% of those deemed eligible to enter the lotteries did not.

In addition, the government has undertaken guarantees on 26 Machir L’Mishtaken projects across Israel totaling 2.8 billion shekels, which the government could end up paying out if the projects are delayed or halted.

Pensions: Civil servants no longer are eligible for pensions fully funded out of the government’s budget, nevertheless the state has massive obligations to government employees, in particular those working for the defense establishment.

The accountant general said that the total cost of those obligations in the years ahead grew to 688 billion shekels in 2017 from 667 billion shekels the year before. Nearly two-thirds of that amount is being paid to current retirees and the rest will go to current civil servants when they retire.

Counting other pension obligations the government has, it total liability runs ton 754 billion shekels through the year 2099.

As to current pension costs, they will amount to 21.5 billion shekels this year, or 1.64% of GDP. The annual figure is due to rise in nominal terms to a peak of 36.2 billion shekels in 2038, although to only 1% of GDP because economic growth is forecast to rise even faster.

Disability allowances: The struggle being waged by people with disabilities for increased allowances is going to saddle the government with 35 billion shekels in added expenses for the National Insurance Institute in the next few years, according to the accountant general’s estimates.

New legislation calls for a gradual increase in monthly disability allowances, to 3,700 shekels, but it contains no mechanism for funding the increase. As it is the NII is headed for actuarial deficit — meaning that its mandated obligations will exceed its income — and that situation is only expected to worsen.

In 2017, the NII paid out a total of 699 billion shekels, including for disability allowances, old-age benefits, workplace accidents and home nursing care. That was up from 643 billion shekels in 2016.

With reporting by Gili Melnitcki and Arik Mirovsky.