National Debt to Be Main Budget Target

The Finance Ministry, the Bank of Israel and the Prime Minister's Office are all laboring over Israel's economic policy targets, and the top priority among mid- to long-term goals is likely to be paring the national debt down to 60% of gross domestic product (GDP), probably within five or six years. As a result, the goal of increasing government spending will be secondary, and limited by Israel's ability to deal with its debt.

Economic policy is currently based on two legislated but inconsistently maintained goals: deficit targets and annual increases in spending. Israel has not always succeeded in achieving its deficit goals; this depends on its economic condition. The 2007 deficit, for instance, is expected to be substantially lower than the target - probably near zero - due to high growth rates.

The annual spending increase, originally set at 1%, has been raised to 1.7% in recent years, but this figure is a bone of intense political contention. Knesset members call again and again for spending to be increased still further in order to advance various social welfare goals. The recent leader of the pack has been MK Prof. Avishay Braverman, who has already announced that he intends to submit an alternative budget spending target.

In response, the three agencies that manage Israel's economic policy have hunkered down for some staff powwows to produce targets that will dictate economic policy in the coming years, and also to attempt to explain the choice of goals and the importance of sticking to them. Reduction of national debt is likely to be chosen as the primary goal.

Israel's debt is currently 80-81% of GDP, compared to an average of about 58% in OECD nations. The stated goal in the European Union is 60%. In other words, Israel's national debt deviates substantially from accepted policy in other developed countries, while by other policy standards - such as public spending compared to gross domestic product, or the tax burden compared to GDP - Israel is very close to the OECD average. That is why paring down national debt is likely to receive priority over other goals.

A debt target of 60% of GDP means that government spending would be cut if an economic slowdown resulted in decreasing tax revenues that prevented debt repayment on schedule.

The treasury, Bank of Israel and Prime Minister's Office all believe that a declining ratio of debt to GDP would best serve the ultimate goal of sustainable growth, both because lower debt would reduce the debt repayment and financing costs, and because lower debt makes weathering economic crises easier. Reduction of Israel's debt burden over the past four years has already saved the nation NIS 10 billion in interest costs annually.

The three agencies are also busy trying to solve other budgetary problems - for instance, the government's tendency to undertake budgetary commitments over the course of the year without even considering the consequences on budget planning. This includes decisions by the cabinet that have economic repercussions, Knesset legislation that has budgetary consequences and even court decisions that force the state to undertake heavy expenses, such as the High Court of Justice's ruling that the state must fortify buildings in Sderot against rockets. All of these are often issued without first studying the financial implications of the decisions.

As a result, the treasury prepared a 2008 budget that included increased spending of NIS 4 billion (1.7%), but in practice has already promised NIS 13 billion, forcing it to decide what to cut rather than setting priorities for 2008.

To prevent this, plans are afoot to rein in economic legislation in the Knesset by requiring all such bills to be approved by at least 60 MKs rather than the current 51, and to restrict cabinet decisions with economic repercussions to certain dates of the year only - and only if they come with a proposed source of funding. In other words, the government would be forced to decide what to cut if it approved added spending.

Another issue under discussion is decentralizing management of the budget by taking decisions out of the treasury's hands and letting them be made by other government ministries. The goal is to strengthen the ministries' professional capabilities and give them more say in the allocation of their budgets. The ministries would also be given incentives for economic efficiency measures - increased budgets, for instance, for ministries that manage to save more.