Bank of Israel Response to the Government's Decision on the 2013-2014 Budget

05/05/2013

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The Bank of Israel welcomes the fact that the Ministry of Finance has decided to place the deficit ceiling for 2014 at 3 percent of GDP.  This is a correct and important target that indicates a commitment to return to fiscal discipline, and it shows a tremendous effort both in cutting expenditures in relation to commitments, and in bringing tax rates in line with this target.

 

 
Regarding the 2013 budget which, by the nature of things, is consequential, it is difficult to correct the deficit path when we are already well into the year, and while the new budget will apparently be implemented only from the beginning of August.  A deficit of 4.65 percent of GDP this year, following the deficit of 4.2 percent of GDP last year—two years in which the economy has been close to full employment—is still high, and reducing it would be desired.  At the same time, the fact that an effort was made to reduce the deficit during the current year, among other things by bringing forward the increase in indirect taxes even before passing the new budget, reflects the government's commitment to dealing with the fiscal problem.

 
It is very important to create a mechanism to track and control the accumulation of future commitments by the government, such that they will be in line with the expenditure ceiling.  This issue takes on even greater importance in order to make sure that the behavior that brought us to the current problem with which we are trying to deal now does not repeat itself.  This necessity becomes even clearer in light of the challenge the government is expected to face with the 2015 budget—where commitments for 2015 already exceed the expenditure ceiling.
 
We are faced with a very complex budgetary reality and we need to deal with it courageously.  The message sent by the rating companies last Thursday—that we are losing control of the budget—is something we have known and understood for some time, at least since July 2012.  We cannot now claim that Israel constantly maintains budgetary discipline.  Therefore, despite the fact that the Ministry of Finance is making great efforts to formulate a more reasonable budget for 2013 and a good budget for 2014, we must not relax these efforts.  We must continue trying to reduce the deficit for 2013.  We need to ensure that we meet the deficit target of 3 percent for 2014, and we already need to start working so that we are able to create a proper budget—with a low deficit—for 2015 and the years thereafter.