Gov't Running Huge Deficit This Month

The government seems to be running a huge deficit this June. At an estimated NIS 5.5 billion, it's double the overdraft the government ran in each of the preceding months.

The estimate, calculated at the Finance Ministry, is based on government spending during the first 17 days of the month. In recent months the government has routinely run a deficit in the range of NIS 2.6 billion to NIS 3 billion.

The reason for the shortfall in cash versus spending needs is the steep drop in tax revenues, which is a consequence of the recession.

In a sign of how hard the times are, June will be the 18th month in which tax collection is lower, in inflation-adjusted terms, than it was in the parallel month of the year before.

The budget for 2009 assumes a deficit of 6% of Israel's gross domestic product, or NIS 44.4 billion. The 2010 budget, which is being passed together with the one for 2009 (there is none so far, even though the year is half over), assumes much the same: that the government will run a deficit of 5.5% of GDP, or about NIS 43 billion.

The Finance Ministry estimates that it will be collecting NIS 12 billion in tax in June, the lowest monthly figure since December 2006, when the government took in only NIS 11 billion. In June 2008 the government collected NIS 13.8 billion. Spending has been particularly heavy this month, which wasn't covered by the increase in tax on cigarettes and gasoline: Those added NIS 130 million.

In May the treasury collected NIS 14.9 billion in tax, up from NIS 14.1 billion in April and NIS 14.7 billion in March.

Meanwhile, the Bank of Israel cast doubt on the government's aim to lower Israel's debt-GDP ratio after 2010.

An analysis of the budget proposal presented to the Knesset this week notes the slew of "one-time steps" in the planned budget for 2009 and 2010, mainly in respect to taxation. Also, the government has a lot of spending pledges, which will last after 2010, pursuant to long-term plans and agreement, the Bank of Israel says.

Third, the government under Prime Minister Benjamin Netanyahu has pledged to cut taxes significantly between 2011 and 2016. Implementing the tax cuts as planned will increase the deficit, says the Bank of Israel, by about 1% a year. If the government forgoes the tax cuts, on the other hand, the central bank does see a possibility for reducing the debt-GDP ratio.

In short the central bank feels there is a significant gap between the government's spending commitments from 2011 onwards and its planned levels of deficit and spending.

To resume decreasing Israel's national debt relative to GDP, the government will have to reduce its pledges and spending per capita in 2011 and 2012, the central bank warns. Therefore, it doubts the state will prove able to lower Israel's debt-GDP ratio after 2010.

In its analysis, the Bank of Israel predicts that economic growth will shoot up 4.5% in 2011, 5% in 2012 and 4.5% again in 2013.

This year, however, the central bank predicts that the economy will contract by 1.5%. For next year, on the other hand, it foresees modest growth of 1%.