Prime Minister Benjamin Netanyahu on Wednesday approved a Finance Ministry proposal to tighten spending limits for the state budget, starting with the national budget for 2015.
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The plan, drawn up by Finance Minister Yair Lapid and the director of the ministry’s budget department, Amir Levi, would reduce the amount by which the national budget is permitted to increase each year to 2.63% from a previous level of 4%.
If approved by the cabinet on Sunday, at its weekly meeting, the change to the spending rule will reduce the projected national budget for 2015 by around 8 billion shekels ($2.3 billion). Most, if not all, of the cuts will come from the health, welfare and education budgets.
The plan to change the fiscal rule and as a result to reduce the state budget was a key factor in thedecison earlier this month to cancel a scheduled income-tax hike in 2014. The tax increase would have increased the government’s revenue by 4.5 billion shekels.
Citing low levels of civilian per capita expenditure relative to othe developed economies, the Bank of Israel has been recommending increasing both taxes and government spending.
The decision to go with tightening up fiscal rules was based on two assumptions.
The first is that the rate of economic growth will decline in the next few years, from an annual average of 4.8% in the past decade to just 3%, including revenues from natural-gas production. The second is that changes to the methodology used by the Central Bureau of Statistics to measure the size and growth of the economy will make the expenditure rule less stable than it was in the past.
The new expenditure rule will be determined by a formula based on the population growth rate over the past three years and the desired ratio of debt to gross domestic product relative to the actual debt-to-GDP ratio.
If the cabinet approves the new rule, the government budget deficit is projected to fall from 3% of GDP in 2014to 2.5% in 2015, 2% in 2016-2018 and 1.5% in 2019.
The spending rule has been changed several times in the past several years. At the start of the last decade it was just 1%. It was later increased to 1.7%, in accordance with Israel’s population growth rate, while keeping per capita spending unchanged. For the 2013-2014 budget the fiscal rule was raised to 3.35%, and was set to rise to 4% in 2015.