November 3, 1996

MAJOR PROVISIONS OF THE BUDGET, FISCAL 1997

(Communicated by the Finance Ministry – ECONOMIC INFORMATION ABROAD)

1997 Budget Policy

Size of the Budget

– The State Budget for 1997 is NIS 190.8 billion.

– The activity budget, including revenue-dependent expenditure, is NIS

201.1 billion.

– Expenditure not including servicing of debt (principal) is NIS 165.6

billion.

– Budget expenditure will be equal to 47.6% of the forecast Gross

Domestic Product.

Budget Goals

In its State Budget proposal for 1997, the Government is focusing on four main goals:

– reducing of the balance-of-payments current account deficit to $3.5

billion in 1997;

– creating conditions for continued stable economic growth;

– reducing the inflation rate;

– immigrant absorption.

Reducing the Balance-of-Payments Deficit

The deficit on balance-of-payments current account climbed to $3.9 billion in 1995 and has shown signs of a further increase in 1996. This increase reflects corresponding growth of the trade deficit: from $6.7 billion in 1992 to $11.1 billion in 1995 and continued expansion in 1996. Underlying this trend are rapid increases in economic activity, a falling unemployment rate, and an upturn in inflation. The swift increase in the current-account deficit reflects a decrease in the national saving rate coupled with protracted investment momentum.

In the past few years, Israel has experienced rapid export-oriented growth driven by large-scale immigration, absorption of immigrants in the labor market, and impressive development of new export markets. Because the balance-of-payments gap may jeopardize these achievements, the deficit trend should be corrected. The following corrective measures are warranted:

– an increase in public savings, achieved by restraining public

expenditure and resuming the downtrend in the proportion of labor

employed by the public sector.

– Structural reforms in various industries and the public sector, thus stimulating competition, facilitating continued rapid growth of business-sector product, and sustaining the proportion of investment in

Gross Domestic Product.

Creating Conditions for Continued Stable Economic Growth

In the six years between 1990 and 1996, Gross Domestic Product increased by a cumulative 40.5% and business-sector product expanded even more vigorously, at 50.2%. An important goal in planning the 1997 budget is to keep the economy growing, thus allowing the unemployment rate to continue falling and standards of living to rise gently, after the exceptionally rapid increases in private consumption over the past few years.

To this end, we should strive for stable growth in the long term, with emphasis on export-oriented growth focusing on the business sector.

The policy measures needed to attain this target, on which the Draft Budget is based, are intended to achieve the following growth rates in 1997: 3%-4% in business-sector investments in nondwelling industries, 7% in exports, 4% in Gross Domestic Product, and 4.5% in business-sector product. The unemployment rate is expected to stabilize in 1997 at approximately the 1996 level.

The 1997 budget policy will be applied in several major respects:

– reduction of the budget deficit; – reduction of the share of the budget in GDP; – reduction of the share of debt in GDP; – structural and other changes to stimulate growth; – large investments in economic infrastructure and an expansion of

spending on education.

Reduction of the Budget Deficit

Keeping the budget deficit in check is an important way to create suitable conditions for growth. The Deficit Reduction Law, enacted by the Knesset in 1993, set the maximum domestic budget as a share of GDP at 3% in 1994 and less in each of the following three years. As a framework for economic policy in the coming years, the Government decided to switch to a total deficit target instead of the domestic deficit target used in the past five years. The total deficit target in the next five years will decline from 2.8% of GDP in 1997 to 1.5% of GDP in 2001, as against 3.6% in 1996.

To attain the 1997 target, the Government had to effect a budget cut of NIS 4.9 billion.

Reducing the deficit, combined with an upturn in sales of State-owned enterprises and banks, tends to mitigate the need to raise capital domestically (net). This should help bring down medium- and long-term interest rates and thereby stimulate the propensity to invest.

Cutting the budget deficit and reducing monetary absorption have the further effect of reducing the ratio of national debt to national product. Reduction of the relative burden of national debt has favorable macroeconomic implications, including improvement of the international reputation of the Israeli economy.

State Guarantees

The State is able redirect financial resources to economic players through the extra-budgetary device of loan guarantees. Such guarantees are given to various entities through decisions made by the Minister of Finance and approved by the Knesset Finance Committee. The guarantees are given under the State Guarantees Law, 5718-1958, and under additional statutes pertaining to foreign trade, encouragement of investments, and other matters. State loan guarantees, like the budget, contribute to Government-stimulated demand in the economy.

By law, the extent of guarantees each year may not exceed 10% of the annual budget. In 1994, the State provided various entities with NIS 4.2 billion in guarantees. Net outstanding guarantees at the end of 1994 were NIS 9.3 billion.

Ratio of Debt to Gross Domestic Product

The Government’s total budget-deficit target is lower than the maximum of 3% of GDP permitted under the Maastricht Convention. The target was set this low because Israel’s ratio of debt to Gross Domestic Product is still substantially higher than that in most post-industrial states, despite dramatic decreases in the past few years. Israel’s debt-product ratio in 1996 will be 101% as against the maximum of 60% stipulated in the Maastricht Convention.

The State Budget as a Proportion of GDP

By reducing the share of the budget in GDP over the next few years, pursuant to the trend of the past decade, the Government will redirect more sources to the private business sector.

Investments in Economic Infrastructure and Education

Investment in physical infrastructure is eminently worthwhile in the economic sense, because it provides the growth process with indispensable support. Expenditure for education enhances human capital and thereby helps stimulate economic growth in the long term.