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The amazing 2006 budget outcome

State budget deficit: actual v. target, 1998-2006
(% of GDP)

Source: Ministry of Finance

2006 has turned out a remarkable year, from the point of view of the economy. GDP growth remained high at 5% (compared to 5.2% in 2005), showing that the July-August war had little effect on economic performance. Israel's balance of payments registered its fourth annual surplus, with the surplus reaching an estimated $7.3 billion, almost double the 2005 surplus (the very fact of Israel having a balance of payments surplus is difficult to absorb).

And now, the budget situation: on 9 January, the Ministry of Finance published preliminary data showing that the 2006 budget deficit amounted to just 5.5 billion shekels, half of the 2005 deficit, and to be compared to a target deficit (built into the 2006 State Budget proposal) of 17.2 billion shekels. In GDP terms, the 2006 deficit was 0.88% of GDP (compared to a targeted 3%), the lowest since the growth year of 2000.

This budget outcome for 2006 is not really a surprise. Throughout the year, current data pointed to record tax revenues, resulting from the continuing economic growth. In fact, up to December 2006, the budget had accumulated a surplus: in December itself, there was a very large (seasonal) deficit, which turned the previous accumulated surplus into a deficit for the whole year.

But what about the expenditure side: should the war not have caused a vast increase in government expenditure, that should, in turn, have led to a much larger 2006 deficit than that reported? In fact, defense expenditure jumped in 2006, but the unexpected increase is included in the 2007 budget (governments can play budgetary games like this!), and it is for this reason that in early 2007, to compensate for the defense increase, the Government decided on an across-the-board 3-4% cut in the 2007 expenditure of all other government ministries.

But in the meantime, Israel can boast of a budget well under control. This is important in the eyes of the international business community that looks closely at Israel's ratio of national debt to GDP: the lower the budget deficit, the less the need for the government to increase its debt and therefore the lower the debt-to-GDP ratio. As a result of the limited budget deficit in 2006, together with continuing rapid growth, preliminary data show an unprecedented low level of the debt-to-GDP ratio in 2006.

We can therefore argue that the July-August war also had a limited effect on the government deficit at least for the time being.

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