Fiscal deficit steady at 2.2% GDP

ISRAEL - In Brief 08 Sep 2016 by Jonathan Katz

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The fiscal deficit reached 2.6bn ILS in August and 5.2bn since the beginning of the year (compared to 3.4bn this time last year. The rolling 12 month deficit remained at a low level of 2.2% of GDP (similar to last month) . We note that the fiscal deficit is targeted for 2.9% this year, while the BOI expects the deficit to be 2.5% or below. Tax revenues were on the low side at 22.2bn, (1bn ILS below the initial MOF forecast) but up 3.7% y-o-y in nominal terms in January-August. We note that since the beginning of the year (through July) tax revenues surprised on the upside on a surge of imported new vehicles, strong housing activity (which is heavily taxed) and fairly rapid wage growth (higher than expectations). The BOI expected tax revenues to exceed target this year by 7.8bn ILS due to these three factors. Non-defense spending has expanded rapidly this year, up 8.2% y-o-y in the first eight months of the year, although below the budgeted increase of 11.4%. Meanwhile, defense spending increased by 1.1% y-o-y (following a huge increase in 2015), below the budget allocation growth of 3.7%. Last year the budget was not approved until November and the lack of an approved budget restricted fiscal expenditure to some extent. The bond market is concerned about next year's budget which is fairly expansionary on the spending side, but aims at maintaining the 2.9% GDP deficit target. Much will depend on the level of economic activity, but without the "one time" factors witnessed this year the deficit could surprise on the upside. A more expansionary fiscal policy has already impacted the long-end of the curve, pushing the premium above US T-bills higher.