The treasury is likely to violate the terms of the budget law in 2019 and write a budget that calls for a deficit of 2.9% of gross domestic product and maybe even 3.5%, officials in the Finance Ministry and Prime Minsters Office are saying.
The wider deficit is expected to win the backing of Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon. Officials are worried that the two will be looking at 2019 as an election year and will want to be generous with government spending.
The law requires the treasury to set the 2019 deficit at no more than 2.5% of GDP, which is based on projections for tax revenues. This means that a smaller deficit level means less government spending and helps bring down the national debt as a percentage of GDP, a figure that credit rating agencies look at carefully when they evaluate government debt.
The Knesset has repeatedly amended the law at the behest of the government to exceed the laws target, but in fact the government has been running lower deficits than targeted because tax revenues have run far ahead of projections. In 2017, like in the previous two years, it will be about 2%.
An extra 0.4 percentage point added to the deficit target would give the treasury some 5 billion shekels ($1.4 billion) of extra spending.
The view among Netanyahu advisers is that the risk of allowing the deficit to grow in 2019 is small because interest rates are so low, such that an increase in the deficit may not lead to a rise in Israels debt-to-GDP ratio.
The government would do well to exploit low borrowing rates to invest in the economy, they say. Moreover, Prof. Avi Simhon, who heads Netanyahus National Economic Council, said in an interview with TheMarker last week that Israeli economic growth will remain strong – ensuring bigger tax revenues – because of the high-tech sector and, as a result, he supports the idea of tax cuts.
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