* The fiscal adjustment in the 2013-14 budget led to a reversal of the increase in the deficit, restored the credibility of the government's commitment to the declining deficit path, and contributed to a decline in interest rate spreads between
* There is great importance to continuing the reduction of the deficit in accordance with the legislated path, because, given the economy's cyclical position, the current level of the deficit remains high in international comparison, and does not allow an extended decline in the debt to GDP ratio.
* In order to meet the deficit target for 2015, a total of about
* The level of the expenditure ceiling for 2015 will be affected to a large extent--more than
* The expected government expenditures based on programs already approved are markedly higher than the expenditure ceiling--if a price adjustment is carried out the gap is about
* Increasing expenditures in line with the ceiling will require policy actions to raise revenues--by about
The success of the fiscal consolidation program which the government implemented alongside the approval of the 2013-14 budget restored the credibility of the government's commitment to the declining deficit path set in 2009, which is expected to reduce the debt to GDP ratio to about 60 percent by the end of the decade. The strengthened credibility also contributed to the notable decline in the same period in the yield spreads between
Assuming that the budget is fully spent, and based on updated macroeconomic projections, the expected deficit for 2014 is close to the target set by the government, 3 percent of GDP, and the ratio of public debt to GDP is not expected to change significantly this year. Tax revenues are expected to rise by about 5.5-6.0 percent in real terms, compared with 2013, due to a large extent to the increase in tax rates in the middle of 2013. With that, the many changes that have been made since the middle of 2012 in tax rates and tax regulations, and the unusually low global interest rate environment which encourages financial transactions, some of which generate considerable tax revenues, increase the volatility of tax revenues and the uncertainty regarding their short-term development.
Based on the new fiscal rule, the permitted real increase in the 2015 budget is 2.6 percent, which means an addition of
The expected level of expenditure in the 2015 budget--based on existing activities, demographic trends, and the cost of programs approved by the government--is markedly higher than the expenditure ceiling set by the fiscal rule. This is despite the assumption that budget demands that have not yet been approved in defense, education, welfare, and health will not be approved without a parallel cut in other budget items. The gap between expected expenditure and the ceiling is about
The deficit ceiling set by law for 2015 is 2.5 percent of GDP. Based on estimates derived from the
Meeting the deficit targets will allow the government to gradually reduce the debt to GDP ratio to about 60 percent in 2020 (the green line in Figure 1). However, meeting the expenditure ceiling without measures to increase revenues (including in 2015) will keep the debt to GDP ratio in coming years at its current level, in particular in a case in which no price adjustment is made in 2015 (the red line in Figure 1).
See graph here: http://www.bankisrael.gov.il/en/NewsAndPublications/PressReleases/Pages/19-05-2014-FiscalSurvey.aspx
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