Economy strong but public spending lags, Treasury reports

The accountant general in the Ministry of Finance, Yali Rothenberg, released the annual report on performance of the state budget, revenues and the fiscal deficit for 2022 today. Last year, Israel had a rare fiscal surplus, putting it near the top ten among the developed countries. On the important measure of public spending in relation to GDP, however, Israel continues to be below average.

Public spending is the level of the government’s investment in civilian areas such as health, education, and welfare. In 2022, public spending as a proportion of GDP fell by 2.6% to 37.8%, a long way below the 42.6% average for developed countries. The ratio fell in most countries last year, but in Israel the decline was greater than the global average, which was just 1.7%.

The figures are partly explained by high economic growth in Israel in relation to other countries. Israel’s GDP rose by 6.3% last year, and so public spending as a proportion of GDP fell. Another cause is the ending of the special grants paid to businesses and unemployed people during the Covid-19 pandemic period, which were part of public spending the previous year.

A question of policy

Here, the question of economic policy arises. Theoretically, the country could use the rise in GDP, which leads to a rise in state revenues, to increase public spending. The accepted policy in Israel, however, is anti-cyclical, that is to say, when the economy grows, the state reduces support for it, and vice versa.

The rationale for this is that when the economy cools down, and the private sector tightens its belt, the state needs to intervene and release funds in order to help. Thus at the beginning of the Covid-19 pandemic in 2020, a year in which GDP shrank by 2% and tax revenues fell, the state raised spending, in the form of the various grants.

These explanations might have been adequate were it not for a broader problem in public spending in Israel that has continued for two decades. Public spending as a proportion of GDP reached a peak in 2002, approaching the top ten of the developed countries. Since then, however, it has been in continual decline. As the Ministry of Finance report states, “Starting from 2009, public spending has even fallen below the median average of the developed countries, a trend that strengthened in 2021, and led to public spending in Israel being 5.6% of GDP lower than the median for the developed countries in 2022.”

Continuation budget

The report also reviews the continuation budget framework on the basis of which the country is being run until a new budget for this year is passed, which will be at the end of May at the earliest. Under the law, if there is no new state budget, each month ministries are allowed to spend one twelfth of their budgets for the previous year. The Accountant General Department is responsible for managing the continuation budget, and, because of the political circumstances in Israel, it has plenty of experience in that regard. As the report states, “2023 is the seventh year since 2005 in which the government has begun in a continuation budget framework.”

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According to a Ministry of Finance estimate, in years with a continuation budget, spending by government ministries shrinks by 4% over four months. This means an average reduction of some NIS 3.2 billion over a period of four months, since only after a proper state budget is approved can ministries implement new programs. The situation is particularly acute when a new government is in power, and new ministers are prevented from implementing their plans for half a year. This is not good for governance, but at least it will save a few billions shekels from the fiscal deficit expected in 2023.

The Accountant General Department’s report also comments on the UN’s SDG (sustainable development goals). The report finds that in recent years there has been an increasing number of government decisions to do with readiness for climate change and a switch to renewable energy sources, with the aim of coming into line with the other developed countries. In 2021-2022, there were 41 government decisions in this area, which compares with just twelve in 2018-2020.

Published by Globes, Israel business news – en.globes.co.il – on February 7, 2023.

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