Bethel Finance: Bank of Israel: No need for immediate deficit cutting measures

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Bethel Finance news:

The Bank of Israel says that there is no need for the government to adopt immediate steps to reduce the expected deficit in 2012, but it warns of the need to prepare the groundwork to reduce the deficit, if indications arise that confidence in the commitment of fiscal policy to a reduction in the deficit and debt is being undermined.

The Bank of Israel expects the 2012 budget deficit to be slightly lower than the 2011 deficit, but that it will be more than 1% of GDP higher that the ceiling set when the biennial budget was approved. It attributes the greatest part of the expected deviation to changes in the macroeconomic environment since the budget was approved - lower than expected growth, falling prices in the capital market, and a low volume of real estate transactions - and is not due to a breach of the expenditure ceiling specified in the budget or from cuts in tax rates.

The Bank of Israel found that this week's cancellation by the Knesset of the legislated tax cuts is highly significant for the reduction of the deficit and the debt through the rest of this decade. Nevertheless, even after this cancellation, the government faces the need to decide on additional measures to increase its revenues by more than 2% of GDP after 2012 to bring the deficit into line with the legally determined ceilings, if it decides to increase expenditure at the rate permitted by the law.

The Bank of Israel found that the cost of various long-term programs adopted by the government in the fields of education (primary, secondary and tertiary), health, infrastructures, welfare and defense (including the relocation of army bases to the Negev) was far higher than the expected rise of the legally mandated expenditure ceiling. The government will therefore have to prioritize and reallocate expenditure accordingly, in order to keep it beneath the ceiling. Adoption of the expenditure programs recommended by the Committee for Economic and Social Change (the Trajtenberg committee) for post-2012 will require additional effort in determining priorities.