Israel's Treasury Predicts Slower Growth, Thus Forcing Government's Hand

Israeli budget deficit comes in right on target but 2019 may be tougher

FILE Photo: Finance Minister Moshe Kahlon
Emil Salman

The Finance Ministry intends to give the government a revised growth forecast for 2019, more pessimistic than the one from seven months ago. The current prediction is that Israel’s economy will expand by 3.1% in 2019, down from the 3.4% forecast in June. 

This means that tax revenues will also be lower than predicted. Thus, alongside several larger-than-predicted expenditures, the deficit is likely to be 3.5% of GDP, overshooting the government’s 2.9% target. 

With the timing of the current update, the Finance Ministry is trying to show the government that there is no extra money to be used beyond what has been planned in the 2019 budget, which was legislated in March. 

>>Read more: Israel's lucky finance minister is leaving his successor to be the fall guy | Analysis 

The Finance Ministry released its updated forecast now even though it is not required to, another indication of the importance of the message for the treasury. By law, the finance minister has until June 1 to update the forecast.

Though the extent to which the government can increase spending so close to an election is limited, Finance Ministry officials are still worried. Ministry officials suspect that Prime Minister Benjamin Netanyahu may try to increase the defense budget, or that Finance Minister Moshe Kahlon may try to hand out more public benefits such as a tax cut. 

2018 deficit was on target

Israel’s 2018 budget deficit came in at 2.9% of gross domestic product, exactly as planned, Kahlon announced, though this year could be a challenge as both economic growth and tax revenues have slowed in recent years.

Kahlon was more or less right – the deficit, at 38.9 billion shekels ($10.5 billion), was only 400 million shekels more than planned. The government hit its target because revenues were a bit higher than predicted, as were expenditures.

Expenditures came in 1.1 billion shekels higher than planned, a small fraction of the total. Civilian spending grew 6.2%, as opposed to the 5.2% that had been planned; defense spending grew 1.6% versus the 0.4% planned.

Revenues were 700 million shekels higher than planned. This is largely because non-tax revenues were 1.7 billion shekels higher than planned at 32.3 billion shekels.

This year the budget deficit will be a factor of revenues and economic growth. There are already warning signs about revenues over the next few months; the steady increase in the number over the past five years apparently came to an end in recent months. 

This year growth in tax revenues is expected to be modest at best. Between 2013 and 2018, tax receipts grew 6% annually; last year they did not grow at all.

Another big question is growth forecasts for 2019. The budget is based on economic growth of 3.1%, in keeping with the Finance Ministry’s latest prediction. Figures published this week by the Central Bureau of Statistics indicate that growth slowed to 3.2% last year from 4% in 2016. 

A Bank of Israel forecast published this week predicts growth of 3.4% for the year, but as the new Central Bank Governor Amir Yaron said, most indicators suggest that the forecast may be adjusted downward.

Jonathan Katz, a senior economist at Leader Capital Markets, noted that in previous years the Finance Ministry increased the deficit at the end of the year to meet goals by doing certain spending early and delivering tax rebates early. 

Last year, however, the government did the opposite – it delayed certain expenditures and tax rebates until early 2019 to make the deficit seem smaller. This trick lowered the deficit by 0.3 percentage points, said Katz, who predicted that the 2019 deficit would be close to 4% of GDP