Israel’s budget chief has warned about the increase in interest costs

High-ranking officials of the Ministry of Finance warned about the rapid increase in interest costs due to the violation of the state budget, economic uncertainty and war, and said, “Increasing the budget framework can be dangerous for the economy and a negative signal for investors.”

The Knesset’s Finance Committee today discussed a NIS 3.5 billion breach of the 2024 budget framework, to fund it without corresponding cuts or tax increases to allow budgets for war evacuees. Officials issued warnings and pessimistic forecasts.

Budget Commissioner Yogev Gradus told the Finance Committee: “We are in an unusual period. There are precedents, but this is not the case. Growth is very weak, the war has hurt growth in 2023 and even more in 2024. What worries us more is The figure is that we see weakness in the GDP level, also in the growth that worries us most, and shows that most of the growth is coming from public consumption, which tells us that this is not sustainable the reason it doesn’t appear stronger in the data is because of the increase in government spending related to the war.

In the last 12 months, the deficit exceeded 160 billion manats

“We have a very high deficit. We ended 2023 with a deficit almost four times larger than planned, and in 2024 we will be almost six times larger than originally planned. This will affect growth,” Gradus said.

In the last 12 months, the deficit is over NIS 160 billion, which is about 8.3% of GDP. This very large deficit has been excluded from the calculations, even though it is expected to decrease by the end of the year after October 2023. This deficit, when the world’s interest rate environment is high and investors’ confidence in Israel is low (the Ministry of Finance is already preparing to lower Moody’s rating for the second time) – we can pay for it with very expensive interest rates.

Gradus adds that the yield spread of Israeli bonds over U.S. bonds, that is, how much it costs us to raise debt: “The lowering of the deremit has an impact on the loans we receive. We are in a domestic crisis, the rating companies have already downgraded it, and that is a very high interest rate.” expressed in terms of costs and our premium is very high and it seems that the market prices are higher.” That is, despite the pessimism of rating agencies, the market is even more pessimistic.

Gradus continued: “In the 2025 budget, which will be presented here in just a few months, we expect higher interest costs of about NIS 7 billion compared to the pre-war period. A large and expensive debt is already visible in this year’s budget – about NIS 3.8 billion more expensive. This is one of the reasons why Gradus is involved in a very public conflict with the Minister of Finance Bezalel Smotrich, who insists on breaking the budget framework, even though the budget commissioner said that the parallel cut is necessary to prevent growth in the debt ratio and the loss of investor confidence.

As a result, Gradus asked the Knesset not to use the budget violation more than necessary and to be responsible in the 2025 budget: “We have to work very carefully and cautiously. As we increase the spending limit, it adds debt. expenses.” According to Gradus, regulatory measures, namely cuts and tax increases, are badly needed. He said the debt-to-GDP ratio “is one of the central parameters of the stability of the economy. Debt is our emergency reserve, so one of the important things is to keep the debt-to-GDP ratio” As low as possible, in order to respond to crises, we explain to the rating agencies and everyone else that , the state of Israel always knows how to repay a good debt. GDP ratio and we plan to do it now.”

Globes, Israel business news – en.globes.co.il – published on September 11, 2024.

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