Photo Credit: Roy Alima/Flash90
Finance Minister Moshe Kahlon

Israeli state revenues from taxes fell in 2018 by 4.5 billion shekel ($1.3 billion) compared with the previous year, while government expenditure increased by 18 billion shekel ($5 billion) compared with 2017, according to the statements issued by the finance ministry’s Accountant General Rony Hizkiyahu.

The size of the government’s debt relative to Gross National Product is a central indicator in determining the credit rating and the financial stability of the country. Israel’s debt-to-GDP ratio has declined steadily for almost 20 years, which is a good thing, but it rose by half a percentage point in 2018 to 61% of GDP.

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This trend is expected to worsen in 2019, and the finance ministry fears that should it continue, Israel may suffer a downgrading of its credit ratings.

Finance Minister Moshe Kahlon responded to the publication of the accountant’s statements saying: “The report reflects the increase in civilian spending at the expense of defense spending and interest payments in the past year. The responsibility for the economic management of the State of Israel rests with the finance ministry, with all its components, and we will all read the financial reports in order to learn and improve the future working of the government.”

Before the elections, the finance minister notoriously hid the deficit, moving it around from one year to the next, but now it’s time to face the music.

One of the most prominent economic flags raised by the outgoing government, and certainly Finance Minister Moshe Kahlon, was an increase of affordable housing stocks in Israel, in order to lower prices, a policy that led to the supply of basic, Soviet-style apartments to young couples, on land that was been rezoned for contractors with a message of upping quantity at the expense of quality. The result was a failure of the program, which is not popular with its target audience. At the same time, Kahlon declared war on affluent Israelis who invested in second and third apartments in order to maintain the profitability of their money in an economy where bank interests stand at less than one percent.

The result was that the money invested in luxury buildings in Israel migrated to Eastern Europe, Germany and Canada, creating holes in revenues, and dragging much of the local construction and real estate industry into a pit.

The decline in state revenues in 2018 is also explained by the very exceptional revenues recorded a year earlier from various unique sources, one-time revenues that were not repeated in 2018. This while spending remained more or less the same at 100.4% of the budget.

But over the past few years, a clear process has emerged: government spending is growing rapidly and revenues are not keeping up, creating an ever-deeper hole in the state budget.

The year 2018 ended with a budget deficit of 38.7 billion shekel ($10.8 billion), a little above the targeted amount. But the forecast for 2019 and 2020 is for bigger deficits, reaching as much as 50 billion shekel ($14 billion) each year.

The increase in government spending is not even. Health expenditures have increased by 81.7% since 2013, a significant part of which was the result of raising doctors’ and nurses’ salaries; education costs increased in the last five years by 35%; civil servants’ salaries increased by 23.5%.

In contrast, spending on higher education increased during the same years by only 18.3%; and defense spending by a relatively moderate rate of 20.6%.

Altogether, the government debt increased in 2018 by 5.5%, standing at 788.3 billion shekel ($220.5 billion).

At which point we customarily refer to the immortal quote by Illinois Republican Senator Everett Dirksen, “A billion here, a billion there, pretty soon, you’re talking real money.”

Of course, according to his own account, Dirksen never said that. A guy on a plane asked him about it once and Dirksen said, “Oh, I never said that. A newspaper fella misquoted me once, and I thought it sounded so good that I never bothered to deny it.”

Here’s to us, newspaper fellas.

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