With No One in Charge, Israel's Budget Deficit Swelled in 2019

Overspending reached 3.7% of GDP, leaving next government no choice but to impose spending cuts and tax hikes

Israeli banknotes, November 22, 2017.
Olivier Fitoussi

In December 2018, a miracle happened in the State of Israel: The government’s budget deficit which had been growing quickly since the previous summer, suddenly shrunk in a single months – from 3.5% of gross domestic product to just 2.9%, exactly the level that had been targeted in the budget.

Finance Minister Moshe Kahlon expressed pride in hitting the target. But the miracle was short-lived and the deficit has never been under 3% of GDP any time since then.

This year there was no miracle. The state comptroller has been investigating the circumstances of last year’s wondrous achievement and will be issuing a report on it. Meanwhile, for 2019 the deficit grew to 3.7% of GDP, its highest level since 2012. The deficit wasn’t supposed to exceed 2.9%, according to the 2019 budget.

Rising red.

The bigger deficit came as no surprise – the 12-month trailing figures released by the treasury over the course of the year made it clear the deficit would be higher than planned. It peaked at 3.9% in June.

In shekel terms the overspending worked out to 52.2 billion shekels ($15 billion), 12 billion more than the treasury had planned for the year, The problem was on both the revenues and spending sides. State revenues came in 9.2 billion shekels under target while spending was 2.8 billion more than planned.

If there is any silver lining to this, it’s that tax revenues have finally stabilized and even shown some increase in recent months. In December 2019 alone, tax collections grew to 27.3 billion shekels from 25.7 billion a year earlier. The increase was an impressive rise even after factoring in taxes collected from a surge of imports of hybrid automobiles. It’s even more impressive after taking into account that a year earlier, tax collectors were under immense pressure to collect any and all taxes to help bring down the deficit.

The treasury’s chief economist said trend data for the 13 months from a nadir in November 2018 till the end of 2019 point to an annualized increase of 4% in tax collection. That figures takes out the statistical noise from changes to the tax code and one-off collections.

That is a strong rate, but it should be treated carefully: Only a month ago, the treasury said the trend figure showed no more than a 1% rise (although, that said, it related to a slightly different period).

In any case, revenues last year still came in under projections, the reason being that the budget was prepared too far in advance for planners to make more realistic assessments. Planning had been underway two-and-half years ago and the Knesset approved it nine months before it went into effect. But the fact remains that two downward revisions of revenue forecasts also turned out to be too optimistic, the last by 1.2 billion shekels.

In the end, the government took in 347.7 billion shekels for the year, a nominal increase of 2.5% over 2018. As a percentage of GDP, it amounted to 24.7%, the lowest since 2016.

On the spending side, it grew 5.8% to 399.8 billion shekels, almost 3 billion more than budgeted, led by a 7.1% rise in civilian allocations. Spending by ministries climbed 6.3%. Defense spending growth was much more restrained until December, when it suddenly surged higher and brought the yearly increase to 2.9%, 1.2 percentage points more than budgeted.

The public has yet to suffer the fallout of such a large deficit. Three back-to-back elections and no government have put off work on the 2020 budget until deep into this year. When that happens, the fallout will come.

Figuring they have a lot of time till the next election, new governments tend to act more aggressively to contain overspending. But for now, Prime Minister Benjamin Netanyahu’s caretaker government has little legal authority to act. In any case, it has been loath to impose any spending cuts or tax hikes while in the middle of election season.

Officials in the treasury and Bank of Israel have said over and over that the next government will have no choice but to undertake unpleasant steps.