Budget Survey for 2021–2022 and Expected Developments in Coming Years

25/11/2021
All Press Releases In Subject:
Fiscal Policy

·         The state budget for 2021 and 2022 strikes a balance between the wish to avoid a fiscal contraction that may slow the economy’s recovery from the coronavirus crisis and the need to avoid an increase in the structural deficit that would burden the management of fiscal policy in the future.

·         The expected deficit in 2021 is much smaller than had been expected only a few months ago, due to a rapid increase in tax receipts, mirroring the auspicious macroeconomic picture, the minor economic effect of the fourth wave of COVID-19 morbidity, and anomalous increases in investments in the high-tech sector, consumer goods imports, and home sales.

·         Government expenditure on the COVID-19 crisis—NIS 69 billion in 2020—has contracted considerably and now centers on the healthcare system instead of financial support to households and businesses.

·         The freezing of public-sector wage accords, as part of the macroeconomic package deal, made it easier to construct the budget for 2021–22. It is important to base future years’ wage agreements on the trust that the parties to the deal established in order to promote reforms that will improve the efficiency of government services, particularly by integrating digital processes into them.

·         When the 2022 budget is compared with that of 2019—the last year that had an approved budget and the year preceding the effects of the pandemic—two changes in spending stand out: a decrease in the defense budget as a share of GDP pursuant to the multiyear trend, and a major upturn in the infrastructure investment budget due to the maturation of programs that were advanced in recent years.

·         The economic plan approved along with the budget includes important reforms that will support sustainable economic growth, higher productivity, and responses to several structural issues in government activity and budget structure that will enhance the efficiency of government activity and save on budget costs in the long term.

·         The five-year plan for Arab society includes a large allocation of resources for the advancement of human capital, employment, infrastructure, and other matters in Arab society. It also contains mechanisms that will help to surmount barriers that impeded similar moves—albeit smaller—in the past.

·         The budgeting plan of the Greater Tel Aviv Metro is an important step toward the advancement of this critical infrastructure project. However, the enshrinement in law of the division of funding for this project between the general state budget and dedicated receipts, of which there is acute uncertainty as to their size and the timing of their arrival, may impede the advancement of the project and the its resulting expected utility.

·         The raising of women’s retirement age will reduce National Insurance outlays and abet an increase in older women’s employment in the long run. The approved path of aid goes further than previous proposals in alleviating the arrangement's influence on many of the weak groups that the arrangement will adversely impact.

·         The replacement of earmarked bonds with a guaranteed-yield mechanism for the pension funds is likely to generate considerable budget saving in the long run but also comes with considerable financial risks. It is important to manage these risks cautiously because their nature and magnitude are different from those in the other components of the budget.

·         There is a considerable gap between the estimated cost of the government’s existing liabilities and the level of expenditure that is allowed by the expenditure rule after 2022. In the past, as in this year, such gaps made it necessary to raise the expenditure ceiling.

·         Ahead of the next budget, it is important to examine the contribution of the expenditure ceiling, its level, and its structure in view of the need to promote the permanent investments in infrastructure and human capital that are essential for the elimination of productivity gaps between Israel and the other advanced economies, and in view of the importance of maintaining fiscal space.

·         A revision of the historical National Accounts data yielded a more optimistic estimate of the economy’s potential growth rate later in this decade and created a wider margin for the shaping of budget policy. Nevertheless, due to the large structural deficit, a major increase in investment while maintaining a stable debt to GDP ratio, and a fortiori a declining one, still requires both restraint of the growth of other spending and a tax increase.​

To the Full Fiscal Developments​ as PDF file​​​​