Jerusalem, 28 October 1996

BACKGROUND ON THE 1997 BUDGET

(Communicated by GPO ECONOMICS DESK)

Tomorrow, Tuesday, 29.10.96, the Knesset is scheduled to begin debate on the Government’s budget proposals for 1997. As with all legislation, the will require three readings before it is finally passed which is scheduled to be completed by the end of 1996.

Israel’s proposed 1997 state budget will be NIS 190.8 billion. Total spending, excluding loan/debt repayment (principle), will be NIS 165.6 billion, or equal to 47.6% of the country’s gross domestic product (GDP). The 1997 budget without loan/debt repayment (principle and interest) will be NIS 128 billion. The 1997 budget includes a NIS 4.9 billion budget cut agreed upon by the government in July 1996. With this cut, the 1997 budget

(in real terms) will be 1.5% smaller than the 1996 budget.

The planned budget deficit for 1997 is expected to be NIS 9.7 billion, or 2.8% of the country’s GDP, a reduction from 1996’s budget deficit which is forecast to reach 3.6% of the GDP. The government plans to finance the deficit through the sale of government owned companies (NIS 4.3 billion), loans from abroad (NIS 2.8 billion), and loans from the general public

(NIS 3.2 billion).

The aim of the 1997 budget is to create the proper conditions for stable economic growth, to reduce inflation, to continue the absorption of new immigrants, and to reduce the current accounts deficit in the balance of payments.

According to Finance Ministry Director-General David Brodet, "Israel’s economic realities in 1997 are expected to be more complicated and have a higher degree of economic risk. Yet this reality can be controlled through proper economic policies intended to return the economy to the plane required to make economic growth, which relies on an increase in exports, possible." He added, "The hidden budget cuts totalling NIS 4.9 billion are the absolute minimum needed in order to reach our economic goals."

The Finance Ministry’s fiscal policies during the coming year will allow the country to reach its economic goals which include reduction of the budget deficit, decreasing the budget’s representation in the GDP, reduction of the government debt, structural changes to encourage growth, and a high level of investment in economic infrastructure and expansion of education spending. These policies, the Finance Ministry notes, will allow economic growth of 4%, an increase of 3-4% in business sector investments, an increase of 7% in exports, an increase in the business sector growth of 4.5% in 1997, and stable unemployment equal to 1996 levels.

Brodet said that in 1997, Israel must return to conditions that will enable economic growth to be fueled by exports. During the first half of the 1990’s, Brodet noted that economic growth was sustained by an increase in exports and their profitability and by the massive increase in immigration. He said that, along with fiscal policies, the crawling peg exchange rate system should aid an increase in exports and profits.

The 1997 budget will be divided as follows: 31.6% debt repayment; 28.2% supports and transfer payments; 16.7% civilian spending; 16.2% defense spending; and 7.3% investments and credit. For comparison, the 1996 budget was divided as follows: 32.2% debt repayment; 28.4% supports and debt repayment; 16.4% civilian spending; 16.4% defense spending; and 6.6% investment and credit. Ten years ago, in 1987, the budget was divided as follows: 41.6 debt repayment; 22.1 defense spending; 20.1% supports and transfer payments; 10.1% civilian spending; and 6.1% investments and credit.

The Finance Ministry forecasts that income will be derived as follows: 45.1% from direct taxes; 38.9% from indirect taxes; 8.2% from other revenues; and 7.8% from foreign grants. The ministry reports that it is expecting revenues from taxation to rise by 2.4% during 1997.

The peace process is expected to cost NIS 3.6 billion over the years 1994-1998, according to the Finance Ministry.