Israel Cut Public Debt to Record Low 62.1% of GDP in 2016, Marking Seventh Annual Drop

Debt was 62.1% of GDP in 2016, capping 11 percentage point decline since 2007.

Finance Minister Moshe Kahlon, September 2016.
Kobi Kantor

Israel reduced the ratio of its public debt to gross domestic product – a key barometer of a country’s financial strength – to its lowest ever, capping seven straight years of declines, Finance Minister Moshe Kahon said on Sunday.

Israel’s public debt equaled just 62.1% of GDP at the end of 2016, down from 63.9% a year earlier. That still left Israel among the biggest debtors in the developed world, but well below the 108.6% average for all developed countries and an 11 percentage point decline from 80.3% in 2006.

At a news conference, Kahlon stressed the importance of the declining debt ratio to the Israel economy, which he said meant “lower financing expenses, lower rates of interest, more money available for the government – more money for health, education, welfare, young couples, the handicapped, the elderly, Holocaust survivors, enlisted soldiers and all the social spending the government has undertaken for itself.”

That is because debt repayment is a major part of government spending, so less debt frees up more of the budget for other purposes. Israel spends between 33 billion and 38 billion shekels ($8.7 billion to $10 billion) annually on debt repayment, both foreign and local, the third-biggest spending items in the budget after defense and education.

The government’s strong finances enabled it to sell 2.25 billion euros ($2.4 billion) in bonds 11 days ago, part of it at record low interest rates of 1.5% and part of it as 20-year bonds, the longest-dated issue ever by Israel.

Israel's debt is still high

A low debt-to-GDP ratio improves a country’s credit rating and in Israel’s case that has spelled A-plus rating from all three ratings houses – Standard & Poor’s Moody and Fitch. For Israel to rise higher in the ratings and borrow at even lower cost with an AA-minus rating, it would have to reduce its ratio to the 45% of its peer group, which includes countries like Slovenia, Poland, Korea and Chile.

Although Slovenia and Germany cut their debt-to-GDP ratios by more than Israel last year, Israel is one of the few developed economies that has cut its debt ratio at all in the year since 2007 when the global financial crisis forced many governments to step up spending sharply. Israel debt-to-GDP ratio fell 11 points during these years.

The decline last year was made possible by a convergence of favorable factors, including strong economic growth the lifted the 1.2 trillion shekels, a much lower budget deficit that has been targeted by the treasury and falling consumer prices.

The Israeli economy grew a preliminary 3.8% last year, higher than economists had forecasted, while the budget deficit came in at 2.15% of GDP, far less than the treasury had targeted,

A strong shekel versus the dollar and euro reduced the value of foreign debt and interest rates were at a record low on most of the world.

Kahlon had been criticized for failing to use the tax-revenue windfall to reduce public debt even further. Instead, he opted for tax cuts and has signaled plans for more this year. On Sunday he answered back his critics.

“I’m sorry we frustrated all the prophets of doom over the year who poured out headlines about zero [economic] growth and a rising debt-to-GDP ratio that would climb higher over time. We’re sorry, but there’s more good news coming – with God’s help we will continue to surprise everyone with fiscal discipline and a free economy that will bring growth for generations to come,” he said.

Kahlon held the press conference with Michal Abadi-Boiangiu, who was responsible for much of the decline in the debt ratio during her five-and-a-half years as accountant general. She is stepping down this month.