The Bank of Israel’s response to the discussion on the State Budget and the government’s economic program

In view of the beginning of the Knesset’s debate on approving the State budget for 2021-22 and the economic program accompanying it, the Bank of Israel points to the tremendous economic importance of approving the State Budget at this time, given that the economy has been operating since the beginning of 2020 on the basis of an interim budget.

 

The budget framework and composition reflect a number of important macroeconomic considerations:

1.     The need to take into account the state of the economy.  The proposed budget will not rein in activity before the economy is extricated from the COVID-19 crisis.  However, it does not increase the structural deficit—which was high even before the crisis—which could lead to divergence of the debt to GDP ratio and a reduction in the available sources for financing the necessary government investments in future budgets to increase labor productivity and to deal with future crises.

2.     The proposed budget provides a response to issues in the budget structure that are important for the efficiency of government services and their focus on needs that have changed in recent years.  In particular, the budget increases the efficiency of the allocation of resources for the healthcare system and government investments in infrastructure, with an emphasis on public transit, which is essential for long-term growth and expanding the supply of housing in high-demand areas.

3.     Passage of the budget will improve continuity and planning ability in the work of government ministries in many areas, and will minimize operational uncertainty regarding the provision of some government services and various support measures that are critical, particularly in the social sphere.  Passage of the budget will make it easier for the government to function and for businesses whose work plans rely partly on the government’s policy and expected actions.

 

Alongside the budget, a package of structural measures is being presented to the Knesset, including reforms that are important for sustainable growth, most of which are consistent with the Bank of Israel’s recommendations as presented to the government when it was formed.  Among other things, these measures include the advancement of construction of the Metro in metropolitan Tel Aviv, the removal of import barriers, and the streamlining of government regulation and processes to accelerate residential construction and investment in supporting infrastructure.  In addition, the economic program includes processes with long-term effects on budgetary resilience and employment, such as a decision to change the array of earmarked bonds and raising the retirement age for women—which is accompanied by measures to make it easier for women with low incomes who may be harmed by the process.  Some of the measures will certainly require adjustments in the future, based on the experience gathered in their implementation, but the content of the reforms is important and should be put into motion.

 

Another important step that is reflected in the proposed budget is the five-year plan to develop Arab society.  This program includes the allocation of significant resources for the development of human capital, infrastructure, and employment in Arab localities and in mixed cities.  This process is tremendously important for the sustainable improvement of economic well-being in Arab society, but also carries tremendous benefit for the economy as a whole in the increased human capital and increased labor productivity to which the program will lead.​