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Israel’s budget deficit soars

Country must cut spending or raise taxes

by Linda Gradstein, The Media Line

January 14, 2013 | 12:36 pm

Israeli currency

Israeli currency

Israel’s budget deficit for 2012 was more than double the government target, coming in at 4.2 percent of Gross Domestic Product (GDP). In addition, debt is 74 percent of GDP, making economic growth in Israel difficult.

“I think the average Israeli should be very concerned,” Professor Omer Moav, an economist at the University of Warwick in London and Hebrew University, told The Media Line. “The deficit is about $10 billion, which means more than $5,000 per Israeli household. We will have to pay it back – we, our children and our grandchildren.”

The announcement of the deficit came just over a week before Israel’s national election and quickly became a campaign issue.

“Over and over again Netanyahu sets deficit targets that he is unable to meet,” sniped Labor party leader Shelly Yacimovich, who hopes to lead her party to the number two slot after Netanyahu. “In the meantime he is digging a deep hole that he plans to fill with the decreasing funds of the poor and middle class.”

Moav says that Israel’s cost of maintaining its debt is relatively high because Israel pays higher interest rates.

“Israel is a risk economy,” he said. “The political risks and security risks translate into higher interest rates.”

Israel also spends an estimated 6.5 percent of GDP on defense, one of the highest percentages in the Western world. Combine that with the fact that large sectors of Israel’s population – the ultra-Orthodox and the Arab citizens of Israel – have significantly lower employment rates. Those who do work often have low salaries and do not pay taxes, meaning that those who do pay taxes pay more.

Economists here say Israel must cut its spending and increase its tax collection to pare down the debt burden. They say that the Israeli economy is not yet in crisis but it is moving in that direction.

“We are losing our flexibility,” Eyal Kimhi, the Deputy Director of the Taub Center for Social Policy Studies in Israel and a professor at Hebrew University, told the Media Line. “Unemployment here is pretty good, and the economy is still growing although slowly. But Israel will have to increase spending to counter the slowdown and then the deficit will increase even more.”

As that happens, Kimhi says, Israel will find it harder to raise the credit to cover the deficit, and the country will have to spend even more on interest payments.

The 2013 budget will be the first item on the new government’s table after the elections. Current Prime Minister Benjamin Netanyahu is expected to form the next government with a series of coalition partners. The problem, many say, is that each partner comes with its own set of political and economic demands. Perhaps for this reason Netanyahu may prefer a coalition with centrist parties, rather than the ultra-Orthodox, who make financial demands that could increase the deficit even further.

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