Expected actual budget expenditure in 2012 and in the medium term vis-a-vis the budget targets

07/12/2011
07.12.11
 
Expected actual budget expenditure in 2012 and in the medium term vis-a-vis the budget targets
 
To view this press release as a WORD file - Click here
 
To the full paper - Click here
 
  The budget deficit in 2012 is expected to be slightly lower than the 2011 deficit, but more than one percent of GDP higher than the ceiling set when the budget was approved.
  As the expected higher than target deficit derives from the macroeconomic environment, and given the expected moderation in economic activity it appears that at this stage there is no need for the government to adopt immediate measures to reduce the deficit in 2012.
  The deficits in the years after 2012 are expected to be significantly above the ceilings specified in the law. The cancellation of the planned tax rate cuts over the next few years in accordance with government and Knesset decisions is very important as it underscored their commitment to the deficit ceiling and to the reduction of the debt/GDP ratio, particularly in light of the fact that the deficit in 2012 is expected to exceed the limit.
  Despite the cancellation of the tax cuts, the government will have to introduce additional tax rate increases, cuts in expenditure to a level below the expenditure ceiling or a combination of both, from 2013, to avoid exceeding the deficit ceiling and to allow a significant reduction of the debt/GDP ratio, unless economic activity expands at an exceptionally high rate.
  The cost of implementing already accepted government decisions on specific programs in the areas of education, health, welfare, the infrastructures and defense is far above the expenditure ceiling set by law for 2013 and beyond. The closure of this gap will require a re-examination of priorities and a corresponding allocation of the budget. This deviation from the ceiling will also make it difficult to hold back the rate of increase in expenditure to below the maximum rate in order to help reduce the deficit.
  The adoption of the expenditure programs for 2013 and beyond proposed by the Committee for Economic and Social Change will compel the government to make further major decisions regarding budget priorities so as to avoid breaching the expenditure ceiling.
An analysis performed by the Research Department of the Bank of Israel shows that the expected budget deficit in 2012 will exceed the ceiling defined in the law by more than one percent of GDP. The greatest part of the expected deviation is explained by the changes in the macroeconomic environment since the budget was approved–– lower growth than expected, falling prices in the capital market, and a low volume of real estate transactions––and does not derive from a breach of the expenditure ceiling specified in the budget or from cuts in tax rates. In light of this, the Bank of Israel assesses that there is no need for the government to adopt immediate steps to reduce the expected deficit in 2012. Nevertheless, the Bank draws attention to the need to prepare the groundwork to reduce the deficit if indications arise that confidence in the commitment of fiscal policy to a reduction in the deficit and debt is being undermined.
The analysis also examined the expected path of the budget aggregates after 2012. It was found that the cancellation by the Knesset this week of the legislated path of tax cuts is highly significant for the reduction of the deficit and the debt during the rest of this decade. Nevertheless, even after this cancellation, the government faces the need to decide on additional measures to increase its revenues by more than two percent of GDP after 2012 to bring the deficit into line with the legally determined ceilings, if it decides to increase expenditure at the rate permitted by the law. The expected cost of various long-term programs adopted by the government in the fields of education (primary, secondary and tertiary), health, infrastructures, welfare and defense (including the relocation of army bases to the Negev) were also examined. It was found that the additional cost of these programs was far higher than the expected rise of the expenditure ceiling according to the law. As a result, the government will have to prioritize and reallocate expenditure accordingly in order to maintain it beneath the ceiling. Adoption of the expenditure programs recommended by the Committee for Economic and Social Change for post-2012 will require additional effort in determining priorities.