Summary:

  • This year the government amended the deficit ceiling, allowing it to rise following the steep drop in tax revenues due to the economic slowdown. In other words, it enabled the 'automatic stabilizers' to operate.  
  • As a result of the reduction of the debt/GDP ratio between 2003 and 2008 and the more moderate impact of the economic crisis in Israel than elsewhere, the increase in the deficit was not accompanied by a rise in Israel's relative risk or in the interest rate on the public sector debt. Hence, in contrast with the crisis of 2001-03, this time the government did not have to deploy a policy of restraint during the crisis.  
  • The moderate nature of fiscal policy in Israel compared with the aggressive counter-cyclical policy which characterized the developed countries, improved Israel's relative situation as regards the public sector deficit, and especially as regards the debt/GDP ratio. Consequently, fewer long-term effects on fiscal policy are expected in Israel than in the developed countries.  
  • In addition to reflecting the operation of the automatic stabilizers, the large public sector deficit this year also expresses the lagged impact of the reduction of tax rates in previous years.  
  • The elasticity of tax receipts to GDP in Israel during the economic crisis was far higher than its long-term level; this was mainly due to the structural changes arising from the Bachar reform, which served to increase corporate tax receipts from the financial sector.  
  • The low interest rates in 2009 together with the large amount of debt that was rolled over have reduced expected interest payments in the next few years by NIS 3 billion a year relative to the forecasts at the beginning of the crisis.  
  • The existing path of the deficit ceiling, together with the new expenditure rule adopted by the government, constitute an ambitious track which could require significant adjustments on either the expenditure or the taxation side unless the economy shifts to a path of accelerated economic expansion.  
  • The government has recently adopted a long-term plan for extensive investment in the transportation infrastructure. Past experience in Israel and abroad has shown that plans of this kind are characterized by a marked increase in costs relative to the initial estimates, as well as by significant delays in completing the projects.  
  • The development of public sector wages in the last two decades has been in line with the development of per capita GDP; employment, however, reacted acyclically.  
     
     General Government, its Output and its Financing - Full File