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New Israeli govt may have to adopt severe austerity measures
Published in The Saudi Gazette on 03 - 04 - 2019

The country's budget deficit is projected by analysts to rise to close to 4 percent of gross domestic product this year — above a target of 2.9 percent. The deficit was 2.9 percent of GDP in 2018, widening to 3.5 percent in the 12 months to February this year.
ISRAEL'S economy has barely featured in the run-up to next week's general election, yet the central bank and many economists warn the new government will need to cut spending and raise taxes to rein in a growing budget deficit.
The pre-election debate has been dominated by security issues and the possible indictments facing Prime Minister Benjamin Netanyahu in corruption cases. Opinion polls ahead of the April 9 vote suggest a close race between the premier's right-wing Likud party and the centrist Blue and White party.
Netanyahu, who has been in office for a decade, has long touted the economic successes of Israel. Indeed growth is robust, unemployment is low, the Israeli high-tech sector is second only to Silicon Valley globally and foreign investment is strong.
However he and his finance minister, Moshe Kahlon, have cut taxes while spending generously on policies like pay rises for police and subsidies for kindergartens in recent years, leading to a widening budget deficit.
Now the Bank of Israel and many economists warn that the economy is set to slow as a result of weaker global growth, which would hit Israeli exports. The central bank, which has started a gradual process of raising interest rates, said the next government would have to cut spending in coming months as well as raise some taxes.
Analysts expect the spending reductions and tax hikes to reach 10-12 billion shekels ($2.8-$3.3 billion) to narrow this year's budget gap.
"The government that will be chosen will have to make fiscal adjustments," said Bank of Israel Governor Amir Yaron. He added these steps should be taken when the economy was in good shape as they would be tougher to implement if conditions worsened.
"The grey clouds on the horizon should not be ignored," he said on Sunday, referring to reductions in global growth forecasts.
A higher budget deficit and public debt reduce the ability of a country to withstand economic shocks, like another financial crisis, and can also threaten its credit rating and borrowing costs.
Ratings agencies Fitch and S&P said Israel was not at risk of a downgrade in the near term, but also stressed the next government would have to take steps to rein in the deficit.
The country's budget deficit is projected by analysts to rise to close to 4 percent of gross domestic product this year — above a target of 2.9 percent. The deficit was 2.9 percent of GDP in 2018, widening to 3.5 percent in the 12 months to February this year.
The central bank believes the state must stick to a deficit target of 2.5 percent of GDP. At 3 percent, the public debt burden would rise from a current level of 61 percent to 65 percent of GDP by 2025, or as much as 75 percent should the economy worsen, Yaron warned.
The finance ministry, which expects a budget deficit of at least 3.5 percent this year, says the situation is being blown out of proportion, noting Israel is one of the only Western countries to have reduced its debt ratio over the past decade.
"There is a gap of 6 billion shekels that we need to close in a budget of 400 billion shekels ... It's not a big problem and certainly not a catastrophe," Shai Babad, the ministry's director general, told Reuters.
"We are monitoring it. When you have 37.8 Celsius fever you don't go to surgery."
By comparison, the US deficit is expected to be 5 percent of GDP in 2019, France's deficit 2.8 percent, Spain's 2.3 percent, Britain's 1.7 percent and Germany's 1.5 percent, according to International Monetary Fund estimates.
The next Israeli government is likely to be in place by late May.


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