The Israeli government’s budget deficit swelled to 11.7% of gross domestic product in 2020, its biggest by that measure in 35 years, as the government spent record amounts to cope with the coronavirus pandemic, the Finance Ministry said Monday.
The figures, which added up to 160.3 billion shekels ($50.4 billion), was also 9% bigger than the global average for fiscal deficits last year. It was the first time since the 1980s that Israel posted a double-digit deficit. The record was set in 1984 when it reached 14% of GDP.
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Since then, the government has gone on to set deficit targets by law. However, last year the ceiling was circumvented by creating so-called fiscal “boxes” to separate dedicated coronavirus spending from general government spending, enabling the deficit to far exceed the limits. That spending reached 68.6 billion shekels in 2020, less than the 80 billion that was approved. All told, government spending rose by 19.7% from 2019 to 487.5 billion shekels.
The government never submitted a 2020 budget to the Knesset, so ordinary spending last year was based on the 2019 budget allocated on a month-by-month basis plus another 11 billion shakes the Knesset added last autumn. On that basis, the deficit should have been just 52.2 billion shekels, or 3.87% of GDP.
The other factor contributing to the record deficit was a 6.5-billion shekel drop in government revenues from 2019, to 310.9 billion. Money that the National Insurance Institute was due to pay the government also shrank so it would have more funds to cover COVID-related costs.
In fact, the drop in revenues was even sharper. Actual revenues fell short of treasury targets by 19.3 billion shekels last year, as the slowdown in economic activity due to lockdowns and other restrictions caused tax collections to fall.
Yet the decrease in revenues was actually less drastic than the drop in economic activity – the Bank of Israel forecasts GDP contracted 3.7% in 2020 -- would normally have caused. However, the kinds of businesses that were subject to the most onerous restrictions were mainly in low-margin ones, while the workers laid off or put on unpaid leave tended to earn lower salaries. The tax income lost to the government was therefore relatively small.
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“This has been a crisis different from other crises. In past crises, state revenues tended to fall more than the decline in GDP,” said treasury Chief Economist Shira Greenberg.
The deficit-to-GDP figure is based on the treasury’s forecast for the size of the Israeli economy last year, which is forecast to have contracted by just 3.3%. Economists had been much more pessimistic about the economy at the outset of the pandemic, some seeing a drop in GDP of as much as 6.5%. Israel is expected to outperform the 5.5% average drop for countries belonging to the OECD (Organization for Economic Cooperation and Development).
“The reason for the moderate decline in Israel is high-tech, which accounts for a more significant part of the Israeli economy and because exports barely declined in the first three quarters of the year. This was a very positive figure,” Greenberg said.
Israeli merchandise exports have risen 3.6% and despite the drop in tourism, which is deemed a service export, exports of services have climbed 11%. On the other hand, Israeli consumer spending fell by more than the OECD average, she noted.
“The main harm was during the first lockdown, while during the second and third lockdowns it was significant, but less so,” she added. “The fourth quarter will see negative growth, but it will be a lot more moderate.”