Israel’s Public Debt Grows for First Time Since 2009

Officials seek to downplay increase, but economists warn 2019 will likely see increase, too

File Photo: Woman holding Israeli New Shekels, August 2018.
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Israel’s public debt as a percentage of the total economy rose for the first time in nine years in 2018, according to preliminary treasury estimates released on Wednesday.

Public debt was equal to 61.2% of gross domestic product at the end of last year, compared with 60.5% at the end of 2017.

Finance Minister Moshe Kahlon has come under sharp criticism for allowing the budget deficit to grow at a time by increasing spending and refusing to countenance tax increases.

On Wednesday, the treasury was quick to discount the importance of the debt figure, saying the increase was small and that in any case it remains low compared with the 70% or more of a decade ago.

“Despite the increase over the last year, Israel still stands out favorably in the consistent decline in debt relative to GDP since the beginning of the 2008 financial crisis – a decline of 10.9 percentage points,” it said.

Among developed economies, the treasury said, public debt grew on average nearly 25 points from 2008 to 2016. On the other hand, last year average debt dropped one percentage point versus Israel 0.7-point rise.

The debt-to-GDP ratio is watched carefully by international credit rating agencies, especially the direction it is going, when they rate government bonds. A lower debt rating increases the cost of borrowing.

Last August, Standard & Poor’s upgraded Israel’s rating to AA-minus from A-plus, citing economic strengths and fiscal improvements. Although Israel’s public debt remained relatively high, S&S said at the time that fiscal slippages leading to a significant reversal of debt shrinkage were unlikely.

In a report on Wednesday, a Bank Leumi economist said that the debt-to-GDP ratio would probably rise again in 2019. It noted the government revenues from the sale of land have fallen sharply in the past three years as Kahlon sought to cut the price of housing through his Machir L’Mishtaken (Buyer’s Price) program.

“Persistent relatively high budget deficits in the coming years, together with lower revenues from sales of state-owned land, is likely to weigh on the economy’s fiscal profile and in the most extreme scenario even lead to a change in the assessments by the credit rating companies,” Leumi said.

The Finance Ministry attributed the rise in the ratio last year to the government selling more new bonds than it redeemed of existing debt. The increase was due to an increase in the 2018 budget deficit to 2.9% of GDP from an average of 2% in 2015-17.

Other factors were the weakening of the shekel versus the dollar, which increased the value of foreign-currency-dominated debt as well as a small increase in Israel’s inflation rate. The higher inflation plus slower economic growth meant that Israel’s real rate of GDP growth was 3.2%, which was less than forecasted.