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BANK OF ISRAEL
Office of the Spokesperson and Economic Information
February 13, 2013
Press Release
Government budget outcome in 2012 and budget outlook for the coming
years
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The government budget deficit for 2012 was 4.2 percent of GDP, compared
with a target of 2.0 percent of GDP set when the budget was approved at the
end of 2010, and about 1 percentage point of GDP greater than the deficit in
2011.
Most of the deviation from the targeted deficit reflects lower tax receipts
than originally projected. This gap is mostly explained by different
macroeconomic developments than forecast when the budget was
approved.
Bank of Israel projections, based on decisions and programs adopted by the
government, forecast expenditures for 2013 to be 9 percent greater than in
the 2012 budget, and NIS 13 billion above the expenditure ceiling according
to the expenditure rule approved in 2010.
Significant additional gaps exist between the expected cost of the programs
approved by the government and the expenditure ceiling in 2014 and 2015.
If the government aligns the increase in expenditure in 2013 with the
expenditure ceiling, and does not change the tax rates set in law, the deficit,
based on forecast growth of 3.8 percent, is expected to be 3.6 percent of
GDP, greater than the new deficit target of 3 percent of GDP adopted by the
government in the summer of 2012. That is, to meet the deficit target, it will
also be necessary to increase tax rates or to cancel exemptions. If the
government does not adjust its expenditures, the expected deficit in 2013,
based on the costs of the programs approved by the government and the tax
rates set in law, is 4.9 percent of GDP.
Without significant adjustment of the government budget—both a reduction
in government commitments to increased expenditures, and higher tax
receipts—the debt to GDP ratio is not expected to decline in the coming
years, unless the growth rate is especially high – more than 5 percent per
year, on average.
The budget deficit in 2012 was 4.2 percent of GDP, about 2 percentage points of GDP
above the deficit ceiling set when the budget was approved at the end of 2010, and
about 1 percent of GDP greater than the deficit in 2011. Most of the deviation from the
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deficit ceiling reflects tax receipts which were about NIS 14 billion below projections
when the budget was approved. The balance reflects lower than projected non-tax
revenues, for the second consecutive year, and expenditures in excess of the original
budget, made possible by the transfer of unutilized balances from previous years'
budget.
An examination using the Bank of Israel Research Department's tax model indicates
that most of the gap between actual tax receipts and the budget forecast derives from
lower than expected growth of two macroeconomic variables—wages and new home
sales. According to the model, about a quarter of the deviation can be attributed to an
overly optimistic forecast based on the available data when the budget was approved
two years ago. Most of the gap was already identified during 2011, and, at the end of
2011, the government accordingly increased the forecast deficit to 3.4 percent of
GDP. However, as it operated within the framework of a 2-year budget, no
adjustments were made at that time in order to reduce the deficit. It was only in the
second half of 2012, as the deficit continued to grow, that the government decided to
increase tax rates in order to reduce the deficit, primarily heading into 2013.
In addition to below-forecast revenues, the government's expenditures in 2012 were
greater than originally budgeted. If the government does not make adjustments to
reduce the increase in expenditure, so that it is aligned with the expenditure ceiling set
by law, a consistently increasing gap between government expenditure and the ceiling
is expected over the coming years, as several of the government's programs are
multiyear initiatives. In 2013, the gap between total expenditures, including the costs
of the programs approved by the government, and the expenditure ceiling, is expected
to be about NIS 13 billion, and in 2014 and 2015 the gap is expected to be markedly
greater. Aligning the increase in government expenditure with the ceiling set in law will
thus pose a significant challenge to the government when constructing the budgets for
2013 and future years.
An examination of the expected path of the deficit and the debt to GDP ratio in coming
years indicates that if the government reduces the increase in its expenditure to the
ceiling set according to the expenditure rule, and maintains the tax rates set by law
(including already approved changes for upcoming years), the expected deficit will be
higher than the increased deficit targets which the government adopted in 2012, and
the debt to GDP ratio will not decline until the end of the decade. To meet the deficit
target for 2013, NIS 6 billion in increased tax receipts are necessary, which means,
taking into account the effect of taxes on activity, tax rates will have to be increased,
or tax exemptions reduced, by the equivalent of NIS 7.5 billion. After 2013, additional
tax measures will be necessary. If the government increases its expenditures in
accordance with the cost of the programs it has approved, the deficit in 2013 will
reach nearly 5 percent of GDP, and will continue to increase in upcoming years as
well. As a result, the debt to GDP ratio will approach 100 percent toward the end of
the decade, even using lenient assumptions regarding the impact of the deficit and
debt on interest rates and growth.
POB 780, 91007 Jerusalem Tel: 972–2–6552713
www.boi.org.il
Figure 1: The Budget's Expenditure Ceiling 2012-2015
Compared to the Cost of Approved Government Programs
370
365
NIS Billions, 2012 prices
360
349
350
338
340
329
330
320
327
316
310
301
300
290
2012
2013
Legal Expenditure Ceiling
0.0
-0.5
2014
2015
Estimated exp, according to approved programs and agreements
Figure 2
Budget Balance: Alternative Policy Scenarios, 2010-2020
(percent of GDP, assuming average GDP growth of 3.3%)
2010
2011
2012
2013
2014
2015
2016
2017
-1.0
-1.5
-2.0
(% of GDP)
-2.5
-3.0
-3.5
-4.0
-4.5
-5.0
-5.5
-6.0
-6.5
-7.0
Current Legislated Deficit Ceiling (2009 law)
Legislated tax rates and spending according to the exp. ceiling
Deficit ceiling according to the latest government decision (2012)
Legislated tax rates and spending according to approved programs
POB 780, 91007 Jerusalem Tel: 972–2–6552713
www.boi.org.il
2018
2019
2020
Figure 3: Debt to GDP Ratio: Alternative Scenarios 2010-2012
100
95
90
(% of GDP)
85
80
75
70
65
60
55
2010
2011
2012
Current Legislated Deficit Ceiling (2009 law)
2013 tax rates
2014
2015 according
2016
2017
2018
Legislated
and spending
to the exp.
ceiling
Deficit ceiling according to the latest government decision (2012)
Legislated tax rates and spending according to approved programs
POB 780, 91007 Jerusalem Tel: 972–2–6552713
www.boi.org.il
2019
2020