Bank of Israel Warns 2017 Budget Will Exceed Cap by $3.5 Billion

Report faults government for fiscal tinkering that distorts real levels of spending.

Finance Minister Moshe Kahlon outside the weekly cabinet meeting in Jerusalem, Nov. 22, 2015.
Emil Salman

Based on spending commitments already made, Israeli government spending for next year is already 14 billion shekels ($3.5 billion) above its legal limit even before the treasury has begun work on the 2017 budget, the Bank of Israel said on Tuesday.

The forecast was part of a report that was critical of the way the treasury and the cabinet sought to tinker with the budget in order to defer or avoid hard fiscal choices. In that context, the central bank said appropriations that would have upset the budget framework in 2015 and 2016 were pushed off to 2017.

“In addition to the marked increase in the spending ceiling in the 2015 and 2016 budgets, the government deferred at the time putting into effect many of its decisions to subsequent years,” the Bank of Israel said in the report. “The government will again face complex challenges when preparing the budget for 2017.”

By law, spending growth over the previous year is capped. But coalition agreements and other political promises, especially after two governments were formed in rapid succession in 2013 and 2015, have led to a steep rise in government spending in the coming years.

The report is the latest broadside from the central bank, which has been a critic of treasury fiscal policy. In the 2016 budget, for instance, the government has set a deficit target of 2.9% of gross domestic product for 2016, which is above the maximum 2.5% the central bank had urged it to adopt to ensure the ratio of debt to GDP would continue to decline.

Israel’s debt-to-GDP ratio fell to 64.9% at the end of last year from 66.7% a year earlier, thanks to a smaller-than-expected deficit. The lower ratio should help reduce Israel’s borrowing costs and debt-repayment costs.

In fact, the report said, the deficit this year will be much higher than the official figures because the treasury did not properly cost various programs Finance Minister Moshe Kahlon has implemented, such as the “mehir lamishtaken” undertaking – which awards contracts to developers who commit to the lowest price to the homebuyer – in a bid to bring down the price of housing. Many of these costs, the central bank asserted, were made off-budget and give a misleading picture of the state of government finances.

“If the costs of government programs in the real-estate sector, which are not included in the budget, would be recorded in accordance with common accounting principles, the deficit would reach 3.3% of GDP,” the report estimated.

Many of the fiscal maneuvers the government has employed in recent years will become harder, the central bank noted, after the Knesset approved an amendment to Budget Foundations Law. The law says that starting next year the government will have to account for spending that exceeds ceilings in both 2018 and 2019.

“This is an important change: It increases the transparency in budget administration and is intended to halt the process that has strengthened in recent years – providing a response to current budget problems by deferring them, while creating excess commitments for future years,” the report reads.

The central bank also took issue with how the government is accounting for the costs of a massive move of Israel Defense Forces facilities from the center of the country to the Negev to make land available for housing. Although it praised the multiyear fiscal plan for defense spending that the finance and defense ministries reached at the end of last year, it said the 2016 budget did not include the plan’s costs.

Nevertheless, the Bank of Israel said that if recent history repeats itself and government spending stays below the ceiling that was set, the budget should be able to absorb the added cost without upsetting its fiscal targets.