Lapid may raise deficit target to 3.5%

Bank of Israel Governor Fischer expected to strongly oppose finance minister's plan to increase budget deficit for second time in one year. Critics call move 'irresponsible,' say it will negatively affect State of Israel's credit rating

Avital Lahav |Published: 04.14.13 , 15:09

Finance Minister Yair Lapid is planning to raise the budget deficit target for the second time in a row, within less than a year. Lapid is interested in increasing the Israeli government's deficit target for 2014 from 2.75% to 3.5% of gross domestic product.

The finance minister also wants to reduce the required cut in the state budget for 2013-204 by more than NIS 10 billion (about $2.76 billion), and settle for four main sources for the budget cuts: Defense, civil servants' salaries, child benefits and infrastructures.

Finance Minister

Chats by the computer

Baruch Leshem

Op-ed: Lapid's Facebook posts, like Roosevelt's radio addresses, narrow gap between government, citizens

Chats by the computer

Increasing the deficit target (the planned excess of expenditures over revenues) for 2014 leads to an automatic update of the deficit target for 2013, from 3% of GDP to more than 4%. Last summer, the budget deficit for 2013 was already updated from 1.5% to 3%.

The decision was made over the weekend, after Lapid received different suggestions from Treasury officials for additional cuts in the state budget and rejected nearly all of them, leaving the planned cut in the budget at more or less the same amount discussed before the elections: An NIS 3-4 billion ($830,000-1.1 million) cut in the defense budget, and similar cuts in children's allowances, civil servants' salaries and the Ministry of Transport and National Infrastructures budget.

A budget cut based on these four sources will reduce the government's expenditures by some NIS 12 billion ($3.3 billion) in 2013 and by a similar sum in 2014. The cut required to balance the budget, so that the government meets the budget deficit it set for itself, totals some NIS 35 billion ($9.6 billion). The finance minister must find sources for another NIS 10 billion. The only source he can turn to, without any further cuts in the state budget, is the deficit target.

If the plan is implemented, the deficit target will be changed through the State Budget Law submitted to the Knesset for approval.

'Sign of weakness and lack of leadership'

Lapid's plan is considered controversial. Setting a deficit target of more than 4% of GDP will likely not allow the government to continue reducing its debt-to-GDP ratio in the coming years. In addition, this will be the second time in a row that the government's deficit target is increased within less than a year.

Those who oppose the move see it as a sign of weakness and lack of leadership, warning that it will negatively affect the State of Israel's credit rating. They also stress the fact that government is choosing to increase the deficit target while the economy is still growing.

Raising the deficit target is acceptable at times of recession, in order to allow the government to continue pouring demands into the market and helping the economy grow through the state budget. But raising the deficit target at times of economic growth, in order to allow the government to deviate from its planned expenditures, is considered an irresponsible move.

The move's supporters, on the other hand, raise one main argument in its favor: The deficit target is never maintained in practice, and it wasn't maintained last year either. The Israeli government reached the end of 2012 with a deficit of 4.2% of GDP (NIS 38 billion), while the deficit target in the Budget Law was 2.5%, due to a lower than expected income from taxes. If the deficit target isn't maintained in any event – why not raise it, the move's supporters ask.

The finance minister is expected to meet with Bank of Israel Governor Stanley Fischer in the coming days to discuss his plan. Judging by Fischer's attitude towards the last increase in the deficit target, he is expected to strongly object the move.

"It's not good and unreasonable," Fischer said last summer about the decision to increase the deficit target to 3%. "They are talking about a 3% deficit as if we will reach it, but I'm not certain we will reach it in case of a recession," he noted.

Fischer also predicted that it would not be the last time he would be presented with such a proposal. "I heard someone say yesterday that there is no difference between 2.5% and 3%," he said. "In that case, there is also no difference between 3% and 3.5%, and we'll reach 5% without any problem."