After Years of Decline, Israeli Government Debt Looks Set to Climb

The debt-to-GDP ratio has been improving since 2004, but the trends now aren’t favorable

The Achva halva factory in the Ariel industrial zone, August 2018.
Moti Milrod

Israel’s debt is growing and stoking fears that the country is at the end of eight good years during which the ratio of debt to gross domestic product has fallen. The improvement in that key metric of a country’s financial health has been a product of a fast-growing economy and good fiscal management by the government.

In the first nine months of this year, government debt has risen by 33 billion shekels ($8.9 billion), or 4.4%. That’s about in line with the target of the Finance Ministry, which seeks to raise an average of 4 billion shekels a month, gross, in the domestic market.

To really understand Israel and the Middle East - subscribe to Haaretz

Still, the ministry has been looking carefully at the latest figures for GDP growth from the Central Bureau of Statistics. If the growth slowdown continues, the treasury will have a hard time continuing to cut the debt ratio.

The accountant general says the government debt (which is only the debt of the national government) was 59.2% of GDP in 2017. Total public sector debt, which includes, for example, local governments’ debt, was 60.9%.

Red state
Adjusted government debt, NIS billions

Fifteen years ago, the figure was 100%, and in the middle of the 1980s it was 180%. The ratio has been declining since 2004, with a short break during the global economic crisis. If the figure doesn’t fall this year, it will be the first time since 2009.

In August, the Bank of Israel warned that, barring any surprises, total debt would probably increase to 61% this year from the bank’s estimate of 60.4% for 2017.

In shekel terms, debt has grown 50% in the past 15 years, but this isn’t an unusually big increase and by itself no reason to worry. Israel’s economy grew even faster in those years.

What’s worrying is that this year economic growth and debt growth may be growing at the same pace. The real rate of GDP growth in 2018 is expected to be about 3.5%, according to most economists – though the treasury measures nominal growth when it looks at debt.

Israel’s declining debt has helped boost its credit rating, reducing borrowing costs and thus letting the government spend on other programs, whether education, health or defense.

Concerns about the deficit have taken on added resonance in recent weeks after the Finance Ministry said that in the 12 months through October the deficit had grown to 3.6% of GDP, far above the 2018 target of 2.9%.

That marks a sea change from recent years when the deficit came in under target, mainly due to one-time tax windfalls that boosted collections above what the treasury had forecast.

The debt ratio was also lowered by a strong shekel, which made the government’s foreign currency obligations less expensive in shekel terms. More recently the shekel has weakened against the dollar. Only about 14% of Israeli debt was foreign debt as of the second quarter, but because of the weaker shekel this number rose sharply from just 11.5% at the end of 2017.

On Wednesday, the treasury updated the figures for November, and they showed little change. The deficit improved but to just 3.5% of GDP. An official said the treasury was still confident that the total for all of 2018 would fall to between 3% and 3.2%, “unless something catastrophic happens.”

“The deviation from the target of 2.9% won’t be significant when you’re talking about a budget of 400 billion shekels a year,” said a senior official who asked not to be named. “The deviation will be very marginal.”

In any case, even if 2018 ends well, 2019 is expected to be more challenging. GDP isn’t expected to grow significantly faster, but the budget deficit is expected to widen. The combination of slower growth and a growing deficit will increase the debt-to-GDP ratio unless the finance minister acts by cutting spending and/or raising taxes.

In a response to TheMarker, the treasury sought to downplay the impact of economic growth on the debt ratio. “The size of debt-to-GDP is very much influenced by market factors including the inflation rate and the exchange rate at the end of the year,” it said.