ISRAEL’S FISCAL PROSPECTS IN THE POST-COVID-19 ERA

11/07/2022 |  Martin Eichenbaum, Federico Puglisi
 

Abstract

We reassess the fiscal position of the Israeli and U.S. governments, and argue that Israel faces three potential challenges. First, the deficit-to-GDP ratio was higher in 2019 than it was on average from 2010 to 2019. To keep the government debt-to-GDP ratio stable, the deficit-to-GDP ratio must be closer to its average value from 2010 to 2019. Second, the government will need to make further fiscal adjustments if interest rates on government debt rise modestly or, as forecasted by the Bank of Israel and the Ministry of Finance, the GDP growth rate falls below its pre-COVID-19 levels. The third challenge stems from tail events that impact interest rates and growth rates. Geopolitical risk will always be a fact of life for Israel. A novel first-order concern is that the U.S. may be on a fiscally unsustainable path. To buy partial insurance against these tail events, Israel needs to return to its pre-COVID-19 policy of lengthening the average maturity of government debt.


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