Israel’s budget chief warns on jump in interest rate costs

Senior finance ministry officials warned of higher interest rates due to the state budget breach, economic uncertainty and war, saying that “increasing the budget framework could be dangerous for the economy and a negative signal to investors.”

The Knesset Finance Committee today discussed a NIS 3.5 billion breach of the 2024 budget due to the war, to allow budgets for the displaced, without any tax cuts or increases to finance it. Officials issued warnings and pessimistic forecasts.

“We are in an unusual period. There are precedents, but not like this,” Budget Commissioner Yogev Gradus told the Finance Committee. “Growth is very weak, and the war hurt growth in 2023 and even more so in 2024. What worries us more than the number is that we see a weakness in the level of GDP, as well as in the composition of growth, which worries us more than anything else, and shows that most of the growth comes from public consumption, which shows us that it is not sustainable.” In other words, the business output that has weakened significantly in the private sector, and the reason this is not seen more strongly in the macroeconomic data is because of the increase in government spending due to the war.

The deficit over the past twelve months exceeded 160 billion shekels.

“We have a very high deficit. We ended 2023 with a deficit that was about four times higher than planned, and in 2024 it will be six times higher than originally planned. That will impact growth,” Grados said.

“The deficit over the past 12 months has exceeded NIS 160 billion, which is equivalent to about 8.3% of GDP. This is a very large deficit, even if according to forecasts it is expected to be reduced by the end of the year after excluding October 2023 from the calculations. This deficit, while the interest rate environment in the world is high, and investor confidence in Israel is low (the Finance Ministry is already preparing for a second downgrade of the credit rating by Moody’s) – we may pay for it with very high interest.”

Grados adds that the spread between the yield on Israeli bonds and American bonds, i.e. how expensive it is for us to raise debt, is increasing: “The downgrade affects the loans we take. We are in a domestic crisis, the rating agencies have already downgraded the rating, there is also a negative outlook, and this is reflected in the very high interest costs. Our insurance premium is very high, not commensurate with the rating. It seems that the market is overvaluing the risk.” In other words, despite the pessimism of the rating agencies, the market is even more pessimistic.

“In the 2025 budget, which will be presented here in a few months, we expect interest costs that are about NIS 7 billion higher than before the war,” Gradus continued. “The large and expensive debt can already be seen in this year’s budget – about NIS 3.8 billion more expensive.” This is one of the reasons why Gradus has been embroiled in a very public conflict with Finance Minister Bezalel Smotrich, who insisted on breaching the budget framework due to encouraging tax revenue figures, even though the budget commissioner said that a parallel cut was necessary to prevent an increase in the debt ratio and a loss of investor confidence.

Accordingly, Gradus asked the Knesset not to exploit the budget breach beyond what is required, and to exercise responsibility in the 2025 budget: “We need to act in a very cautious manner. Whenever we increase the spending ceiling, we add debt costs.” According to Gradus, there is a great need for adjustment measures, namely tax cuts and increases. He insisted that the debt-to-GDP ratio “is one of the central criteria for the resilience of the economy. Debt is our emergency reserve, and therefore one of the important things is to keep the debt-to-GDP ratio as low as possible, in order to respond to crises. We have responded very well to crises in recent years. We explain to the rating agencies and everyone else that the State of Israel has always known how to return to a good debt-to-GDP ratio, and we plan to do so now as well.”

This article was published in Globes, Israeli Business News – en.globes.co.il – on September 11, 2024.

© Copyright Globes Publisher Itonut (1983) Ltd., 2024.