Bank of Israel urges NIS 20b budget cuts

The Bank of Israel says it will be necessary to cut the multiyear budgets for 2010-12 by NIS 20 billion in order meet the legally mandated 1.7% annual increase in the budget. Otherwise, the economy will be exposed to high risk.

Each year, the Bank of Israel's Research Department analyzes the consequences of the government's multiyear decisions and fiscal policies, the budget deficit, and debt.

The Olmert government undertook many long-term obligations, such as the Brodet plan for the defense budget, the New Ofek education plan, increasing old-age pensions, railroad and light railroad construction, pay hikes for university faculty, doctors, and teachers, and expansion of the basket of healthcare services. These multiyear programs have budgetary consequences long after the programs are approved.

A senior Bank of Israel official told "Globes", "The problem remains the same. Israeli governments continue to make commitments for grandiose spending without securing the financing resources for them."

The Bank of Israel applied two variables across four scenarios. The first variable is the rate of economic recovery, which ranges from a scenario of zero growth in 2010 to 2.3% growth next year. The second variable is whether the government will comply with the mandated 1.7% annual growth in the budget.

The Bank of Israel advises complying with the 1.7% spending increase target, otherwise the ballooning deficit will necessitate tax hikes.

The Bank of Israel concluded unequivocally that if the government complies with the law, it must cut NIS 20 billion from the budgets for 2010-12. If the government decides not to comply with the law, then, "The economy will be exposed to a lack of credibility and risk that will be hard to live with. We're talking about a dangerous policy that will result in a deficit of 5% of GDP for four continuous years, and a debt-to-GDP ratio of 90-97% in 2012, which is unsupportable," said the official.

Published by Globes [online], Israel business news - www.globes-online.com - on April 21, 2009