Israeli central bank critical of Netanyahu's plan to increase defense spending

JERUSALEM, 22 August (Reuters) – Wednesday, the central bank of Israel criticized a government plan to sharply increase defense spending because it would be at the expense of civilian expenditures and likely the budget deficit and state indebtedness to increase.

Prime Minister Benjamin Netanyahu said last week that he plans to increase defense spending in the coming decade by 0.2 to 0.3 percent of the gross domestic product under the "2030 security concept" in view of the expected threats.

He said his goal was to achieve the annual average economic growth of 3 to 4 percent and the average spending of 6 percent of the gross domestic product for all security needs of Israel.

"The proposal to increase the defense budget … in the next decade is not consistent with the path to a falling deficit as enshrined in the law, government resolutions on the expansion of social services, social programs & infrastructure investments , and the government's reluctance to raise tax rates, "the Bank of Israel said in a report.

"If such a scheme is adopted for defense spending, it must specify clear and transparent funding sources for the plan and reflect the adjustments that the other aggregates will have to undergo."

The criticism of Netanyahu is rare for the central bank, which has spent the last three years mainly with Minister of Finance Moshe Kahlon sparring on his predilection for tax cuts and other tax policy issues.

Israel is scheduled to hold elections in November 2019, but some politicians and commentators have speculated that they may be brought to the next year. Polls show that Netanyahu still leads all political opponents, and defense issues are always a prominent issue in Israeli election campaigns.

The bank noted that raising the defense budget could increase the budget deficit unless it was accompanied by other cuts and tax increases.

"Given the existing decisions on multi-annual spending programs, the aversion to raising tax rates and the importance it has of increasing the defense budget by a rate comparable to that of GDP growth, the government will are challenged to stay within the deficit, decline trajectory … and to stabilize or continue to reduce the debt ratio, "he said.

The fiscal deficit is expected to reach 2.9 percent of GDP in 2018 and 2019, compared with 1.9 percent in the previous year, which was stimulated by one-off factors and stronger than expected tax revenues. The solid budgetary performance led Standard & Poor's this month to increase the credit rating of Israel to "AA-" of "A +".

Nevertheless, the Bank of Israel remained concerned that reducing the budget deficit by around 3 per cent due to higher spending would prevent a decline in debt, which in 2017 was 59.4 per cent of GDP, excluding the municipalities' debt.

It noted that the use of creative accounting methods by the government, such as temporary provisions, future excessive cutbacks and bond issuance, would only create budgetary issues in the coming years.

"From the experience of other countries and the experiences of Israel in the past", according to the central bank, "it appears that bypassing the budget limits, even if done with good intentions in the first instance, can ultimately end in the loss of control over the fiscal framework and the need to implement budget corrections at times that are less suitable for policymakers. "(Reporting by Steven Scheer, editing by Ori Lewis, Larry King)

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