Debt Ratio for 2006 Set to Be the Lowest in Israel's History

The major economic goal of reducing the level of Israeli national debt is finally in reach this year, but the question of whether the state can continue to improve its debt situation in coming years is in serious doubt.

The Finance Ministry's estimates from the beginning of July, before the fighting in the North started, predicted that Israel would finish 2006 with the lowest ratio of debt to gross domestic product (GDP) in its history - only 89 percent.

That would be an incredible achievement when compared to the 106 percent level that Israel reached in 2003. It would be a major milestone in Israel's attempt to reach internationally acceptable debt levels in the range of 70 percent of GDP.

But the enormous budgetary demands for 2007 by various government ministries, and in particular the Ministry of Defense, along with fears of a slowdown in the economy, will probably make this achievement a one-time-only event and the debt ratio will rise again in 2007.

Just before the hostilities broke out on the Lebanon border, Israel produced new economic records as a result of two years of sustained, high economic growth.

The ratio of debt to GDP in 2005 was 100 percent, down from 106 percent in 2003, but still far from the average of 70 percent for the Western world.

The ratio of national debt to GDP is one of the most important economic measures for examining the strength and stability of a country. A low debt level is expected to help Israel during these difficult times, and help the state keep its international debt rating. It will also help Israel remain an attractive destination for foreign investors.

The treasury, which produced the debt estimates before the war in the North started, is expected to use the new figures to improve Israel's economic image in the world.

The drop in the debt ratio in 2006 is a result of two major factors. The first is technical, and relates to changes made in the way the debt is calculated by the Central Bureau of Statistics (CBS). These changes will lower the ratio by about 5 percent for 2006.

The second major - and more important - factor is the impressive rates of economic growth of the Israeli economy in the last year.

As a result of the rapid growth, Israel is expected to enjoy at the very least a NIS 6 billion surplus of tax revenues over expenditures for 2006. In addition, there are further revenues such as the taxes on the Iscar deal, NIS 4 billion; the sale of Israel Discount Bank and Bank Leumi shares by the state, NIS 3.5 billion; and savings from changes in management of the government's cash reserves, another NIS 5 billion; as well as other revenues.

Together, all this will allow the state to pay off billions of shekels of debt in 2006, and therefore reach the record low debt ratio.

While the new debt-to-GDP ratio may reflect Israel's economic stability, the deterioration of the security situation may make such achievements a thing of the past - and 2007 may mark a rise in debt once again.

The fear is that the various ministries will receive large increases in their 2007 budgets. The Defense Ministry has already received an additional NIS 500 million this year, and is requesting NIS 4-6 billion more for next year. At the same time the war is expected to cut economic growth, and the expected payments for war damage and losses will certainly be in the billions.

Also, the figures for June - even before the outbreak of hostilities in the North - were not as good as previous months.

June's tax revenues were a billion shekels less than the average of previous months. This has already reduced the forecast surplus for 2006 from NIS 10 billion to only NIS 6 billion (not including the Iscar deal tax revenues).

Nevertheless, no one today can guess what the tax revenue and economic growth figures will be for the coming months.