Israel ended 2012 with a huge budget deficit, and is now facing huge spending cuts and tax increases amid slower growth. Nevertheless, in a recent interview with TheMarker a senior Finance Ministry official tried to dispel the prevailing pessimism, acknowledging policy mistakes but insisting that the economy is in better shape than is generally thought.
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"The public is gloomy. It affects officials at the treasury and the Bank of Israel," the official said.
"We saw it last summer when all the newspapers ... talked about the danger of mass unemployment. When the finance minister and the governor of the Bank of Israel tried to reassure them, no one listened. The panic even reached credit rating agencies overseas. It subsided when numbers for the third quarter came out that showed unemployment has dropped," he said, adding that an overseas bond issue that was oversubscribed and sold at record low interest rates confirmed confidence in Israel.
The official, who asked not to be identified, complained: "The public's pessimism was being fed by the media, which kept warning of impending massive unemployment."
Continuing, he said, "The economy had some significant achievements and, were it not for events outside our control, 2012 would have seen a 4.7% growth rate, to everyone's acclaim." These events included the halt of natural gas deliveries from Egypt, the sharp downturn in Europe and Operation Pillar of Defense.
"Even with these the economy grew by 3.3%, or 1.5% per capita, among the highest rates for a Western country in 2012."
The impact of the suspension of Egyptian natural gas deliveries, a process that began in 2011, followed by the halt of deliveries from the Tethys Sea field later that year, trimmed one percentage point off economic growth in 2012. Had Israel enjoyed its full quota of natural gas this would have added two points to the growth rate, since the only available option was using more expensive fuels.
Natural gas supplies from the Tamar field will begin in 2013, which the treasury says will boost gross domestic product 3.5%. Tamar will reach full capacity in 2014, when the Finance Ministry expect GDP to grow 4%.
The senior official said the downturn in the euro zone economy was worse than anticipated, diving into negative territory. This cut Israel's GDP growth rate between 0.1 and 0.2 points, about the same amount as Operation Pillar of Defense in the Gaza Strip in November of last year.
The official dismissed any claims that the biennial budget had hampered the economy by being too inflexible to cope with changing economic conditions. "We saw the deficit early in 2012 and knew already then that the flow of gas would further diminish. We could have slashed expenditures and raised taxes at that point, but we chose not to hinder the overall growth trend. Our decisions can be criticized, but not our lack of attention and failure to address the issues," he said, adding that Bank of Israel Governor Stanley Fischer supported the strategy.
The government opted for "mild" tax hikes in September to avoid affecting growth and held off harsher tax increases amounting to NIS 14.4 billion for 2013. "We knew that the shortfall would be in the 4%-5% range, and informed international rating agencies," he said.
Senior treasury officials were surprised by the 2.5% annualized growth rate for the last quarter of 2012. They had expected the figure to be smaller because of Operation Pillar of Defense, which paralyzed much of the country for nine days and hurt tourism.