Treasury Warns: Prepare for Economic Decline

The 2008 budget was presented to the Knesset Finance Committee by Finance Minister Roni Bar-On yesterday.

The 2008 budget was presented to the Knesset Finance Committee by Finance Minister Roni Bar-On yesterday. The House is slated to approve its first reading next week, and second and third readings by the end of December.

During the committee meeting the treasury's director general, Yoram Ariav, noted that exports would be somewhat adversely affected by the U.S. sub-prime crisis. "We must be prepared for a more pessimistic outcome" he added. "We still do not know whether the U.S. economy is headed for a soft or hard landing."

Harel Belinda, deputy director of budgets, said that although the economy is in the midst of one of the longest positive business cycles in Israel's history, "we see worrisome signs of a slowdown." Belinda added: "It is becoming more difficult to maintain growth rates of recent years".

Criticizing a privately initiated bill, Bar-On said, "The demands for additional budgeting in light of excess state revenues from taxes is based on a sort of illusion." He described the private bill as reckless "enough to make one's hair stand on end." "Even if part of the bill is reasonable, there are priorities."

The 2008 budget will be NIS 301.5 billion, exceeding NIS 300 billion for the first time. According to the proposed budget, the economy will grow at a rate of 4.2 percent next year, and private consumption will increase by 4.3 percent, while public consumption will go up by less than half of that - 2.0 percent. Employment rates will increase from 56.5 percent in 2007 to 57.2 percent, and unemployment will drop from an average of 7.5 percent this year to 7.2 in 2008.

The budget contains two sections: the regular budget of NIS 216.4 billion, and the development and capital accounts budget totaling NIS 85.1 billion. The 2008 budget expenditures will be 1.7 percent higher than in 2007.

The defense budget constitutes the largest slice from next year's huge budget, at NIS 50.5 billion (including U.S. assistance). The Education Ministry's budget for next year will be NIS 27.6 billion, and NIS 6.1 billion is to be allocated to higher education.

The year 2008 is defined by the treasury as the "year of education." Some NIS 1.5 billion has been earmarked to begin implementation of the education reform, and NIS 720 million for reform in higher education. The Education Ministry budget will be increased by about NIS 5 billion upon completion of the reform, as will the budget for higher education, by NIS 1.4 billion. The Internal Security Ministry will have a total budget of NIS 9.3 billion, of which NIS 7.2 million will go to the Israel Police.

Pension budgets including government assistance to veteran pension funds reaches the huge total of NIS 9.2 billion. Some NIS 34.5 billion is earmarked for interest and fees, even though interest payments will decrease by 5.3 percent in 2008 as a result of lowered interest payments on internal and foreign loans.

The GDP will break NIS 700 billion, and reach NIS 715.6 billion. GDP for 2007 is set to increase by 5.4 percent, and the treasury expects a growth rate of 4.2 percent next year (compared to 2.5 percent on the average in developed nations). GDP per capita will rise by 3.6 percent this year, and by 2.5 in 2008.

The 2008 budget was based on a ceiling deficit of 1.6 percent, or NIS 11.5 billion, compared to the 2007 targeted deficit of 2.9 percent (the final figure for 2007 is expected to be substantially lower). The treasury estimates that exports will increase in 2008 by 4.7 percent, and imports by 4.6 percent. Inflation will remain in the mid-range of government target (1 percent-3 percent), about 2.2 percent. The debt to product ratio, on which the treasury and Bank of Israel place great importance, is expected to continue to fall, from 81.7 percent by the end of this December to 79.7 percent at end December 2008.

The allocation for the 2008 defense budget will climb to an all-time record of NIS 50.5 billion, constituting more than 16 percent of the state budget, about 7 percent of Israel's gross national product. Civilian expenditure clauses total NIS 11.1 billion.

The basis for the 2008 defense budget, according to the Brodet Commission's proposal, is NIS 49.35 billion (including a NIS 2.87 billion increase in accordance with the commission's recommendations). The defense system has already been provided a NIS 0.5 billion down payment on its 2008 budget. In the fourth quarter of 2008 the Defense Ministry will also be entitled to draw on the expected increase of $150 million in U.S. military aid to Israel in 2009. The additional NIS 650 million budgeting is defined as a revenues contingent expenditure.

Unlike the budgets of other ministries, which are financed solely by sources in the economy, the defense budget includes U.S. military aid, which will be $2.55 billion in 2008. Since 1991 U.S. aid funds have been deposited in a U.S., interest accruing account, with the interest being added to the aid. Interest in the account totaled NIS 128 million in 2006.

The Defense Ministry published its unclassified budget for the first time last year, when it totaled NIS 10.4 billion. This figure is set to increase to NIS 11.1 billion in the 2008. Pension payments to career army personnel constitute the largest single expenditure in this section of the defense budget, totaling NIS 4.3 billion, compared to NIS 3.9 billion in 2007. Some NIS 1.2 billion will be diverted in 2008 to construction of the separation wall(the so called "seam area project'), NIS 145 million less than in 2007. Another NIS 1.2 billion is earmarked for support of widows and families of IDF fallen and commemoration projects.

State revenues from taxes in 2008 are expected to total NIS 190 billion, according to treasury estimates. The result of the conservative forecasts for this year was that there was a huge surplus in tax revenues of over NIS 12 billion. The entire surplus will be directed to reducing the national debt, instead of being used in part to increase social budgets.

The treasury's tax revenues forecasts for 2008 assumes an adjusted 4.2 percent increase in the GDP, a 2.4 percent increase in production prices and net tax cuts (following legislation) of NIS 6.8 billion. Deducting legislative changes, adjusted revenues from taxes are expected to increase by 2.8 percent, lower than the projected economic growth rate.