Israel's Government Budget Deficit Shrinks – but Only Due to Technical Reasons

Overspending remains high after discounting for tax revenue windfall in October 2018

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Israeli Finance Minister Moshe Kahlon in Jerusalem, on October 9, 2018.
Israeli Finance Minister Moshe Kahlon in Jerusalem, on October 9, 2018. Credit: \ Ronen Zvulun/ REUTERS

Israel’s budget deficit – the subject of growing concern among economists and investors – took a sudden turn lower in September but only for technical reasons, figures released on Monday by the Finance Ministry showed.

The deficit for the 12 months through September dropped to just 3.3% of gross domestic product, still well above the 2.9% target for 2019 but down sharply from the 3.8-3.9% level if had been running at in the previous few months.

However, the reason for the drop was due to a surge in tax revenues in October 2018, which temporarily reduced the 12-month deficit.

Discounting for that, treasury figures showed that the deficit was still 3.8% of GDP.

The increased tax revenue was due to the High Holiday occurring last year mainly in September. To make it easier for taxpayers during the lengthy holiday season, the Israel tax authority allowed them to delay payments until October, thereby swelling receipts for that month and impacting the 12-month deficit a year later.

The 2019 budget assumed a deficit in shekel terms of 40 billion shekels ($11.4 billion at current exchange rates), so the latest figure indicates that the government is running past its target by about 13 billion shekels.

In the past year under Finance Minister Moshe Kahlon, the deficit has been a cause of growing concern, especially as back-to-back elections this year have prevented Prime Minister Benjamin Netanyahu’s government from taking any serious action to address it. The stalemate in coalition talks threatens further delays, pushing off the formation of a new government until later this year and risking the possibility of a third round of voting.

Last week, the international credit ratings agency Moody’s affirmed Israel’s high A-1 credit rating, but said the deficit would likely come in at 4% this year and boost Israel’s debt-to-GDP ratio in the process. It hinted that if policy makers don’t address the issue, Israel’s credit rating could be jeopardized.

“The failure to form a new government, or the formation of a disparate coalition unable to command the internal consensus needed to advance new fiscal measures, would present a risk to Israel’s credit profile,” Moody’s said.

The treasury said that the first nine months of this year has seen a 6% increase in government spending over the same time in 2018 to more than 290 billion shekels. The 2019 budget had called for just a 5.1% increase.

Meanwhile, revenues originally forecast for the year at 356.7 billion shekels, grew at a slower pace of just 3.7% in the first nine months, compared with the same time in 2018. At that rate, revenues will be short 20 billion shekels of the treasury’s projections for the year.