Israeli Government Finally Kicks Off Budget Debate

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Containers at Ashdod Port. Economic growth is slowing. Credit: Tomer Appelbaum

Israel’s economy will grow more slowly in the coming years after two stellar decades, the Finance Ministry’s chief economist said Sunday, preparing the cabinet for the modest growth in tax revenues that will make balancing the budget harder.

Israel’s annual economic growth averaged 4.5% between 1990 and 2010, Yoel Naveh noted, a number that has dropped to about 3% in recent years and is expected to ease to 2.9% between 2013 and 2019. The economy is projected to grow by 2.9% this year and 3% in 2015, Naveh told the ministers.

Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid are expected to meet this week to discuss the budget, although scheduled meetings in recent weeks failed to take place.

Netanyahu and Lapid are also expected to consider the defense budget amid defense officials’ request for a 5-billion-shekel ($1.5 billion) increase. The Finance Ministry is against any increase in military spending.

In his cabinet presentation, Naveh noted that his ministry’s growth projection for this year and next was the same as the that of the Bank of Israel, but it was lower than that of the International Monetary Fund and the Organization for Economic Cooperation and Development.

The IMF expects Israel’s economy to expand by 3.2% this year and 3.4% in 2015, while the OECD sees the two numbers at 3.1% and 3.5%, respectively.

The discrepancy might be explained by the timing of the forecasts’ release. The IMF and OECD put together their forecasts in April, while the Finance Ministry and Bank of Israel did so just last month. Looking a bit deeper into the future, the ministry predicts 2.8% growth for 2016, 2018 and 2019 and 2% growth for 2017.

Reasons for slower growth include the sluggish recovery in international trade, Israel’s slow population growth relative to previous years, and waning competitiveness.

“Employment levels are expected to remain high, as is the level of workforce participation,” Naveh said. “The growth forecast for 2015 assumes a continued global recovery ... and continued trends in the capital markets.”

But Naveh added a caveat: “As a small and open market, Israel is exposed to turmoil in the global economy.”

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