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| 17.06.09 |
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Analysis of the State Budget Proposal for 2009 and 2010 vis-à-vis the Budget Targets and in a Long-Term Perspective |
| A discussion of this subject will appear in the forthcoming Recent Economic Developments, No. 124 |
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The large number of one-off measures included in the 2009–2010 budget, primarily in the sphere of taxation, the accumulation of government commitments for extensive expenditure after 2010 in the framework of long-term agreements and plans, and the decision to reduce tax rates significantly in 2011–16, all raise doubts about the government’s ability to return to a declining path of the debt/GDP ratio after 2010. |
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If the measures included in the 2009–2010 budget proposal are approved, the budget deficit and government expenditure are expected to conform to the new ceilings adopted by the government. |
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Although the expected level of expenditure in 2009 is somewhat below the budget ceiling, the government will need this interstice in order to bring expenditure forward from next year, thereby enabling it to avoid exceeding the expenditure ceiling in 2010, too. |
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If all the tax measures proposed by the government are approved, the revenue forecast in the budget for the next two years is conservative. This caution is important given the uncertainty regarding expected global and domestic economic developments. |
| The Bank of Israel’s Research Department has analyzed the budget proposal for 2009–2010 in accordance with the targets set by the government for the expenditure and deficit ceilings, and has examined the expected path of the public debt/GDP ratio in light of the policy measures adopted by the government. The analysis shows that if the Knesset approves the budget proposal and its attendant measures, the government is expected to meet its targets for 2009–2010 and even to outperform them (see Table). On the other hand, there is a marked discrepancy between the government’s long-term commitments after 2010, on the basis of its specific decisions regarding policy in the various spheres of its activity, and its macro-fiscal targets. To achieve the targeted path, the government will have to curtail many of the commitments it undertook, and per-capita public expenditure will have to fall sharply in 2011 and 2012. Consequently, there are considerable misgivings as to whether it will be able to return to a declining debt/GDP ratio path after 2010, and particularly as to whether it will be able to return rapidly to the debt/GDP ratio attained at the end of 2008. These misgivings are intensified in view of the direct-tax reduction plan launched by the government for 2011–2016, which is expected to reduce its revenues substantially. |
| The analysis of the effect of the tax reduction plan on the debt/GDP ratio path indicates that as its implementation proceeds its contribution to expanding the deficit will rise, and that once the plan is fully implemented it will increase the debt/GDP ratio by one percentage point each year. A demonstration of this effect––assuming that in the medium term government expenditure increases by a real rate similar to recent years, which is also approximately the average of the rise in the expenditure ceiling and the expenditure path which reflects the government’s long-term plans––shows that the implementation of the plan will prevent the debt/GDP ratio from declining in the years following its completion; without it, the same expenditure path will allow a continuous reduction of the debt/GDP ratio (see figure). |
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