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BANK OF ISRAEL
Office of the Spokesperson and Economic Information
March 22, 2017
Press Release
An analysis of the fiscal developments in 2016, a fiscal point of
view for 2017, and expected developments over the remainder of
the decade

The government finished 2016 with a deficit of 2.1 percent of GDP, similar to
2015 and significantly lower than the deficit ceiling set in the budget. The
public debt to GDP ratio declined to about 62 percent.

The lower-than-targeted deficit reflected a) higher-than-expected tax receipts,
which were a result of growth that was more rapid than expected, Israel’s
improved terms of trade, and an exceptional increase in the import of
vehicles—a highly taxed product; b) surpluses in National Insurance Institute
activity that reflected over-estimation of benefit payments; and 3)
expenditures that were somewhat lower than budgeted.

The deficit ceiling for 2017 and 2018 was set at 2.9 percent of GDP, but it
seems that the deficit will be lower in 2017, at about 2.5 percent of GDP, and
that in 2018 it is also expected to be slightly below the ceiling.

The lower-than-targeted deficit is supported by the economy's current near
full employment environment, and by the marked contribution of tax receipts
from the volatile real estate and vehicle markets—which increased by 0.8
percent of GDP between 2012 and 2016.

Primary civilian expenditure in Israel is almost the lowest in the OECD, and
makes it difficult for the government to allocate resources to policy measures
that will entrench long-term economic growth. However, in the last two
budgets, the government significantly increased its primary civilian
expenditure so that its share of GDP is expected to increase by about one
percent of GDP. This expansion reflects the decision to release the
expenditure ceiling, both directly and indirectly, the only moderate increase
in defense expenditure, and the decline in interest payments.

According to the multi-year control mechanism over the budgetary
aggregates (the “numerator”), the government must make sure that its
decisions do not lead to a deviation from the expenditure and deficit ceilings
even in the years following the current budget. At this stage, it appears that
the mechanism has contributed to an improvement in budgetary discipline.

Based on the decisions made thus far, the expected expenditure in 2019 is
similar to the ceiling, but expenditure in 2020 is already expected to be at least
NIS 4 billion higher than the ceiling. The expected deficit in those two years
exceeds the ceiling set in the law, even assuming that the high level of
economic activity is sustained.

Since the expected deficit in the medium term is higher than the ceiling set by
law, government decisions on tax reductions or increased expenditure that
will permanently increase the deficit must be accompanied by measures that
will offset the increase in the deficit.

The low deficits of the past two years supported the decline in the debt-toGDP ratio, but most of that decline in recent years reflected a rapid increase
of the GDP deflator relative to the Consumer Price Index, the repayment of
the public’s debts to the government, and receipts from land sales. Over time,
one cannot assume that these sources will continue making significant
contributions to the process of lowering the debt-to-GDP ratio.
The Bank of Israel today published the periodic fiscal survey that is part of the “Fiscal
Survey and Selected Research Analyses” that will be published soon.
The fiscal survey is the Research Department’s analysis of budgetary developments in
2016, and the expected development of government expenditure and revenue, the
budgetary deficit, and the debt-to-GDP ratio in 2017–2020. This analysis is based on
budget decisions made by the government at the time the 2017 and 2018 budgets were
approved. The analysis shows that the government finished 2016 with a budget deficit
of 2.1 percent of GDP—similar to 2015 and significantly lower than the deficit ceiling
of 2.9 percent of GDP set in the budget. The lower-than-targeted deficit mainly reflects
revenue that was significantly higher than forecast in the original budget, and to a lesser
extent expenditures that were lower than budgeted. The debt-to-GDP ratio declined by
1.8 percent of GDP to about 62 percent—lower than most advanced economies. About
half of the decline in this ratio was achieved due to the low deficit and the erosion of
debt that existed at the end of 2015 relative to the nominal GDP, with the rest of the
decline attributed to the repayment of the public’s debts to the government and the
rapid increase in the GDP deflator relative to the Consumer Price Index—about half of
the public’s debt is indexed to the CPI.
The higher-than-expected tax revenue in 2016 mainly reflected tax receipts that were
about NIS 7.5 billion higher than originally forecast (taking into account the
government’s unplanned deduction to the Compensation Fund). From the difference
between the forecast and actual revenue, about NIS 4.5 billion is explained by the
faster-than-expected increase in nominal GDP. Nevertheless, the variable that made the
largest contribution to the unexpected increase in tax revenue is the import of consumer
goods—mainly vehicles—which contributed about NIS 5 billion to the difference
between the original forecast and actual revenue. Revenue from vehicle taxation in
2016 was about 0.35 percent of GDP higher than the 2012–2015 average, and its large
proportion of total tax revenue indicates the risk to the current level of revenue if the
volume of vehicle imports relative to GDP returns to its level of previous years.
In addition to the high revenue from import taxes, the government has also enjoyed a
high level of revenue from real estate taxes, which mainly include purchase tax,
property betterment tax, and VAT on new dwellings.1 Revenue from real estate taxes
stabilized this year (as a percentage of GDP) at a level similar to its 2015 level, which is
significantly higher than in previous years: about 0.3 percent of GDP more than the
2012–2015 average, and 0.45 percent of GDP more than the 2009–2011 average
(Figure 1). The combination of high revenue from vehicle imports and real estate—two
volatile components—is therefore responsible for an additional 0.5–0.7 percent of GDP
in tax revenues in recent years.
1
The figures on VAT revenue from new dwellings are not directly reported, and are based on
Bank of Israel calculations.
Total budgetary expenditure increased by about 6 percent in 2016, and was about NIS 2
billion lower than the expenditure ceiling set in the budget (adjusted for an exceptional
transfer of NIS 1.5 billion to the National Insurance Institute). Broken down by
expenditure items, the expenditure of civilian ministries was in line with the original
budget, while the “miscellaneous” item and the interest expenditure item were lower
than budgeted—similar to most recent years. The unutilized balance of these items was
used to provide an additional NIS 5 billion to the defense budget, beyond the original
budget and in line with the multi-year outline of the defense budget agreed to at the end
of 2015. It is important to note that even after this addition, defense expenditures
(including expenditures for the transfer of IDF bases to the Negev) declined in 2016 as
a share of the budget and as a share of GDP, further to the trend in most previous years,
and it is currently about half a percent of GDP lower than at the beginning of the
decade. This decline, and the rapid increase in total expenditure, slightly increased the
government’s civilian expenditure excluding interest as a share of GDP, but that still
remained very low by international comparison (Figure 2).
The deficit ceiling set by the government for 2017 and 2018—2.9 percent of GDP—is
significantly higher than the deficit in 2016—2.1 percent of GDP, and is also higher
than in other advanced economies, certainly when taking into account the strong
cyclical position of the Israeli economy. This increase in the deficit ceiling reflects a
marked real increase in the expenditure ceiling—about 6 percent in 2017 and an
additional 3.7 percent in 2018 (adjusted for accounting changes)—alongside a minor
adjustment of tax rates in 20172 and a moderate reduction in tax rates in 2018.
Moreover, the planned real increase in total expenditures—which, in addition to the
expenditure ceiling, includes expenditures that are conditional on revenue3—is about 7
percent in 2017 (compared with estimated performance in 2016) and another 2.5
percent in 2018 (Table 4). This rapid increase reflects the low level of public
expenditure, and the need for the government to increase the sources available to it in
order to achieve its objectives. The increase in revenue-dependent expenditure is based
mainly on one-off or temporary revenue that the government is acting to obtain from
various government-owned companies and public entities such as the Jewish National
Fund, the Airports Authority, and the national lottery. In addition, the revenuedependent expenditure component includes budgets for the transfer of IDF bases to the
Negev totaling about NIS 2.8 billion in 2017 and NIS 2.1 billion in 2018, the
performance of which depends on receipts from land sales by the Israel Land Authority.
The more difficult it is to collect these designated revenues—some of which were
already included in the 2015–2016 budget and not realized—the expenditures
dependent on them, mainly in the budgets for housing, education buildings, investing in
transportation infrastructure, and building IDF bases in the Negev—may be delayed,
which may have a negative impact on achieving important government objectives in
these areas.
2
The total increases and decreases in the tax rates in 2017 offset each other nearly completely.
Revenue-dependent expenditure is expenditure that is made only if revenue is received from a
specific source that is predesignated for that expenditure.
3
In the current budget, in addition to raising the expenditure ceiling, the government also
raised the deficit ceiling and lowered tax rates for 2018, against the background of easy
macroeconomic conditions that are contributing to increased tax revenue. Despite this,
in the current budget as well, a sizeable volume of expenditure is financed by
temporary transfers from non-budget entities or based on recording the sale of assets
(land) as budgetary revenue. As long as the government decides that the acceleration in
the growth rate of expenditures must continue—particularly due to the very low level of
civilian public expenditure in Israel compared to other advanced economies (Figure
2)—it will need to base that on more stable sources of revenue in order to avoid a
permanent increase in the deficit and a reversal of the downward trend in the debt-toGDP ratio.
According to the new budget rules set by law, the government must examine the state
of the budget not only for years for which the budget has already been approved (2017
and 2018 this year), but also against the targets set for later years. Thus, if government
decisions that require budgetary expenditure or reduced revenue are expected to lead to
a deviation from the expenditure or deficit ceilings, the government must in parallel
adopt adjustment measures that will prevent that deviation. The projection of
expenditures for 2019 and 2020 shows that the expected level of expenditure in 2019 is
just slightly higher than the expenditure ceiling for that year—a marked improvement
compared with previous years. The current situation means that any decision the
government may make on increasing expenditures until the next budget is approved
(and basically until the end of 2019) must be accompanied by a decision to reduce other
expenditures. It is important to note that according to the existing rules, an increase in
revenue does not exempt the government from this restriction, since the expenditure
restriction is separate from the deficit ceiling. Even though meeting the expenditure
ceiling for 2019 is a challenge that the government may meet, exhausting the ceiling at
the current stage shows how restraining the expenditure ceiling is compared to needs—
given the very low level of government civilian expenditure in Israel.