Israel: Government presents supportive 2021–2022 budget and growth-enhancing reforms, but Knesset approval still not guaranteed
In early August, the government presented the 2021–2022 budget, which aims to narrow the fiscal deficit gradually while continuing to aid the recovery from the Covid-19 crisis. The announcement could boost sentiment and is a positive sign for the economy, which is still running on an updated version of the 2019 budget due to a failure to pass budgets for the last two years. Moreover, the government announced a fairly ambitious accompanying list of structural reforms which could be positive for growth. The budget was passed by parliament in a preliminary reading in September, but must still gain final approval by early November, which is still not guaranteed given the ruling coalition’s tiny majority. Failure to do so would lead to fresh snap elections.
Spending for 2021 and 2022 is set at NIS 432.5 billion and NIS 452.5 billion respectively, below the 478.5 billion outturn for 2020. The fiscal deficit is seen narrowing to 6.8% in 2021 and 3.9% in 2022 (2020: 11.4% deficit), slightly smaller in both years than the deficits that our panelists expect. Among the key reforms outlined by the government are an increase in the retirement age for women, a reduction in import barriers, the establishment of an authority to streamline regulatory procedures and the construction of a metro line in Tel Aviv.
These measures would tackle some key economic impediments, such as subpar infrastructure and excessive bureaucracy, and if approved could boost the country’s long-run growth potential. However, the budget proposal leaves the politically tricky issue of fiscal consolidation to later in the government’s term: A further narrowing of the fiscal deficit beyond 2022 will be key in order to stabilize the public debt-to-GDP ratio.
In a speech on the budget announcement, Bank of Israel Governor Amir Yaron commented:
“It is important to be aware of the need to reduce the structural deficit starting with the 2023 budget, in order to avoid having the debt to GDP ratio grow out of control and to enable the large additional investments that are necessary in infrastructure and human capital in order to narrow the productivity gaps between Israel and the other advanced economies.”