Israel Ends Q1 With Increased State Revenue but Experts Warn of Dangers Ahead

State revenue up by 19.8% compared to 2020’s Q1, but Israel’s public debt has gone up from 60% of the country’s GDP in 2019 to 73% today

Israel recently marked 12 months since the beginning of the coronavirus crisis last March, which also was the start of a difficult year for economies worldwide. Reports released recently by Israel’s Finance Ministry reveal a complex picture of the economic situation in the country, after a year of limitations.

An April 12 report detailed a noteworthy increase in state revenue in the first quarter of 2021 compared to the same period in 2020. This, despite the fact that January and February 2020 were coronavirus-free months in the country, economically speaking. The increase comes following the country’s record-breaking vaccination drive that has seen almost 5 million people out of the country’s 9 million citizens vaccinated. Israel has since been able to reopen its economy, and the state’s coffers are reaping the benefits.

At the same time, the accumulated budget deficit over the past three months is significantly higher than during the same months last year, reaching 22.4 billion shekels compared to only 13.3 billion shekels last year, a result of the eruption of the pandemic. The large budget deficit is indicative of huge government spending, which is keeping the deficit high despite the increase in revenue since reopening.

The budget deficit is part of a larger trend this past year, that is not unique to Israel. The pandemic has demanded that governments take action to aid their citizens and their economies, and this has increased state spending accordingly. In response to the crisis, Israel approved a budget of more than 200 billion shekels (some $60 billion) for aid programs. Almost 135 billion shekels of this budget already have been spent on unemployment benefits, financial aid to businesses and other such programs.

Dr. Michael Sarel, head of the Economic Forum at the Kohelet Policy Forum, told The Media Line that “the pandemic and the lockdowns that the government had to enforce as a result of the pandemic caused a very sharp decline in economic activity during the three lockdowns. The first one in particular but also during the other two.” The decline in activity led, in turn, to a decline in state revenue, which has fueled the growing accumulated budget deficit, reaching more than 180 billion shekels at the end of March 2021.

This year’s spending has increased Israel’s national debt significantly. The country’s debt, calculated as a percentage of its Gross Domestic Product (GDP), had been steadily declining over a decade, landing at 60% in 2019. According to a Finance Ministry estimate, however, by the end of 2020 GDP had reached 73%, almost erasing a decade-long effort to bring it down.

Israel’s GDP was $392 billion in 2019, according to The World Bank, almost equivalent to the GDP of the US state of Colorado. In the Middle East, Israel is the fourth largest economy, following the United Arab Emirates, Iran and Saudi Arabia, with the Saudis enjoying a significant size advantage over the rest of the region, and a GDP of $793 billion. Israel is significantly smaller than both Iran and Saudi Arabia. Its GDP shrunk by 2.4% in 2020, according to the Finance Ministry, though this is lower than the negative growth expected as a result of the pandemic.

Sarel explains that the large boost given to the budget deficit during the crisis isn’t a major cause for worry. If Israel has truly put COVID-19 behind it, he says, “as the months go by, this 12-month deficit will shrink” because government expenditure will decrease significantly and economic activity return to normal. Wider vaccination of populations around the world also will contribute to this return to normalcy.

However, the economist says there is a different issue threatening the Israeli economy. “The big problem is the structural deficit with which we entered the crisis. At the end of 2019, Israel had a structural budgetary deficit of 5% of its GDP … when you have a deficit of 5% of the GDP, the ratio of public debt to GDP increases significantly every year, even with acceptable [economic] growth.”

Contrary to a deficit created by special events like the pandemic, structural budgetary deficits are created by government policy – in days of peace and not of emergency – that spends more than it collects in taxes. This contributes to the national debt. To counter this, Sarel explains, Israel needs a stable government that will be able to carry out unpopular moves such as raising taxes and cutting budgets. But Israel has not been able to generate a stable government over the last two years, recently going to its fourth round of national elections. “At present, we aren’t experiencing an [economic] crisis,” he says, adding that if a government isn’t formed in the wake of the March elections, and Israel continues to spend as it does, further enlarging its debts, the country could be in serious trouble when another crisis comes along.

Professor Elise Brezis, who teaches in Bar-Ilan University’s Economics Departments and heads the Azrieli Center for Economic Policy, also ties Israel’s ability to move forward from its current position to its politicians being able to form a stable government. However, using a comparative approach, Brezis takes a more optimistic view of the situation.

Israel’s budget deficit “isn’t great but it isn’t bad,” she told The Media Line, adding: “Compared to other countries, we are exactly in the middle of the OECD countries.” Brezis notes that Israel also enjoys the advantage of putting the coronavirus crisis behind it earlier, after inoculating a majority of its population.

In addition to the rise in economic activity, exhibited by the increase in state revenue, Israel also has seen a steady decline in the unemployment rate. Reaching a height of 36% in April 2020, the percentage of Israelis without a job came down to 12% by December 2020, according to the Finance Ministry. This significant decline is still far from Israel’s pre-pandemic 3% unemployment rate.

While Israel’s debt has increased to 73%, this is still extremely low. The American public debt stands at 131% and it increased by 22% in 2020. Spain has seen a rise of 27% in its debt during this period, and currently owes 123% of its GPD.

This comparison leads Brezis to believe that Israel shouldn’t rush to correct its structural budget deficit and raise taxes, contrary to the opinion of Sarel. “It isn’t bad,” she says, because other countries owe more than 100% of their GDP. Brezis also points out that Israel has significant foreign currency reserves that “also makes our situation great globally.”

Yet, as Israel hopes to make its first steps with COVID-19 off its back, Brezis says that the dangers to the Israeli economy lie not in the coronavirus, but in longer-term policies. The professor decries Israel’s poor achievements in education as a threat to the country’s economic growth. She also points to the ultra-Orthodox community, which she claims receives an unequal share of government funds because of political maneuvering – a claim not uncommon in Israeli political discourse.

“If we don’t do something with [funding for] the ultra-Orthodox and with the education system, we will drown,” she said.