Views varied on many issues, yet there was no argument on one thing: The budget’s expense side must adhere to the multiyear model determined by legislation two years ago (the “Trajtenberg formula”) and the deficit cannot be 1.5% of our GDP, the target pledged by the government. “The previous deficit target is no longer relevant,” said most session participants. But what should it be replaced with? That’s unclear.
One option is to unilaterally adopt the new European Union’s budget convention. The convention was drafted in the midst of the Greek debt crisis and orchestrated by German Chancellor Angela Merkel. The signatories pledged to limit their deficit to only 0.5% of GDP and include this budgetary target in their constitution or Basic Laws.
The deficient target was defined awkwardly because during recession years, when unemployment grows and the government’s income plummets, the deficit must be adapted to the state of the economy. Otherwise, the numbers are misleading and the government makes flawed decisions. This tough convention was approved by all EU states with the exception of Britain. Over the weekend, some 61% of Ireland’s citizens voted in favor.
Yes, we can
Can Israel afford to adopt such ambitious budgetary convention? The structural deficit of the public sector (“broad government,” as the Bank of Israel defines it) adjusted to the business cycle reached some 4% of GDP last year. Is it realistic and desirable to bring it down to only 0.5% of GDP by 2016? Yes it is, and the correction must come only on the tax side. There is no room for substantial cuts in expenditures: After all, the government share of GDP in Israel is the lowest among all OECD countries.
Between 2007 and 2011, the taxes reduced here totaled some 4% of GDP: NIS 36 billion (nearly $9 billion,) that’s the budgetary shortfall at this time. Moreover, the government approved in the fall of 2011 the Trajtenberg Committee’s recommendations without explaining where the full funding shall come from. Committee members hoped that this social package will be partly funded by the defense budget; yet this won’t happen. The defense establishment made huge budgetary demands.
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