Last week, the Ministry of Finance Accountant General published an initial estimate of Israel’s public debt (which includes local authority debt) as a proportion of gross national product. According to the estimate, the debt:GDP ratio rose from 60% at the end of 2019 to 73.1% at the end of 2020. Central government debt at the end of 2020 is estimated at 71.6% of GDP.
Ministry of Finance sources say that the true test will come in 2022. GDP is expected to grow in 2021, the latest growth forecast being 4.6%.
The Ministry of Finance’s announcement states that government spending rose by NIS 78.8 billion in 2020 comparison with 2019, while government revenues fell by NIS 29.4 billion, leading to a thirteen percentage point rise in the government’s financing requirements in comparison with the debt:GDP ratio in 2019.
This rise is actually less than expected, both because of the Bank of Israel’s ability to buy bonds in the secondary market, thus indirectly lowering the cost to the government of raising money in the primary market, and because of the appreciation of the shekel, which largely neutralizes the inflationary consequences liable to follow from a sharp rise in public debt.
The final figures for the debt:GDP ratio and broader analysis of government debt will be published in the annual report of the debt unit in the Accountant General’s Department.
Accountant General Yali Rothenberg said, “The debt:GDP ratio rose last year as a result of the substantial growth in government activity and in the fiscal deficit in order to deal with the coronavirus crisis. This rise came after a decade in which the ratio gradually fell, by a cumulative 11%, reaching 60% in 2019. The rise in 2020 is less than expected, both because of the resilience of the economy, as seen in the figures for the fall in GDP, and also as a result of the effect of market factors on the debt figures. We expect that the debt:GDP ratio will continue to rise in the next few years, but it is highly important that we should return to a decline in this ratio in the period following the economy’s recovery from the crisis.”
Mizrahi Tefahot Bank (TASE:MZTF) chief economist Ronen Menachem told “Globes”, “A debt:GDP ratio of 73% is exactly in line with previous estimates and represents relative success, considering the expenditure involved in coping with the coronavirus pandemic. The negative aspect of this result is that it took ten years to reduce the debt to 60% of GDP, which is the accepted standard for developed countries, but both in absolute terms and on an international comparison, Israel’s position is more than reasonable. This is thanks to a very low debt:GDP ratio at the start (60%); many countries began the pandemic period with a higher debt:GDP ratio than the one Israel rose to at the end of 2020.
Israel ends 2020 with 11.7% fiscal deficit
“For the credit rating agencies, this debt:GDP ratio will be a supporting datum for reaffirming Israel’s credit rating. It is likely that in a scenario in which the pandemic is halted, vaccination yields rapid results, and monetary and fiscal policy is flexible, we will be able to contain the event such that the debt:GDP ratio will perhaps grow by a few percentage points, and then will begin to shrink again, as happened in the decade before the pandemic broke out,” Menachem said..
Published by Globes, Israel business news – en.globes.co.il – on January 24, 2021
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