|
The
government's total deficit fell in 1999 from 2.4
percent of GDP to 2.25 percent, continuing the
decline from 4.1 percent in 1996 to 2.8 percent in
1997. Despite the fact that the decline in 1999
fits in well with the declared strategy of
long-term reduction in the deficit, i.e., fiscal
consolidation, the path of the deficit during the
year and government decisions taken during the
period reviewed regarding the deficit for the year
2000 and beyond create difficulties in continuing
this strategy. When the government started
discussing the budget in August 1999, it was
estimated that at the end of the year the deficit
would total 3 percent of GDP. Consequently, the
government raised the target for 2000 from the
1.75 percent specified in the original law to 2.5
percent of GDP, a rate which reflected a decline
from the then prevailing estimated deficit for
1999. Since then the planning environment has
changed:
a)
Income tax has increased as a result of economic
recovery, enabling the deficit in 1999 to fall
from 3 percent to 2.25 percent of GDP, so that the
plan fixed in August 1999 now represents a rise in
the deficit, in opposition to the long-term
strategy described above, and
b) The probability that growth in 2000 will exceed
3 percent - the assumption on which the budget for
2000 was based - has risen. It is important to
avoid a situation in which this growth finances
additional government expenditure made possible
without exceeding the budget deficit target for
the year; such expenditure is liable to become
permanent, and in the future will require a rise
in the tax rate. The change in the planning
environment is likely to weaken the strategy of
fiscal consolidation. In those years the Budget
Deficit Reduction Law was breached after the
government passed a Supplementary Budget in 1994
based on high tax receipts, the result of the boom
set off by the influx of immigrants. Dangers of
this type are not unique to Israel's economy
showed that in the 1970s, 1980s, and the first
half of the 1990s, OECD countries would spend all
the income received in periods of rapid growth,
and this led to the significant and continued rise
in the share of public expenditure in GDP. The
rise incorporated all three main components of
public expenditure - public consumption, transfer
payments, and public-sector investment.
These
results, combined with the new planning
environment described above, paint a
threatening picture for the strategy of
reducing the share of government
expenditure and deficit in GDP. The year
2000 will provide an important testing
ground, as wage agreements for 1999 and
beyond are signed. Wage agreements in
the public sector signed in 1993 were,
in retrospect, the main cause of
deviations of the deficit. Another test
is expected in 2001 and thereafter,
years for which a deficit declining by
at least 0.25 percent of GDP per year
has been set; this is given as a
function of growth, but without
specifying the rate of growth required
to achieve this reduction, and without a
government undertaking not to raise
taxation.
The success of fiscal consolidation
depends on the extent to which it is
based on reducing the share of public
expenditure in GDP, and not on raising
the tax burden. A reduction in the
deficit of 0.25 percent of GDP, as
required by the law, by means of
lowering the share of public expenditure
in GDP without raising tax rates is
consistent with maintaining the
long-term volume increase in public
expenditure of about 3 percent, with GDP
growth of 3.5 percent. If the rate of
growth reaches 5 percent, and the rate
of volume increase in public expenditure
remains constant, this will be reflected
in a cut of one percent of GDP in the
share of public expenditure, with a more
rapid return to the original path
specified in the Budget Deficit
Reduction Law. .
|
General Section
