Yogev Gradus, head of the Budgets Division of the Ministry of Finance, commented at the Globes Investment Conference on the large challenges that the Israeli economy faces because of the continuing war. Talking to "Globes" macro-economic reporter Oren Dori, Gradus described how the fiscal deficit arising from ballooning defense expenditure was being dealt with, and the difficulty in passing measures to narrow the deficit.
The conference session opened with a question to the audience on the defense budget, which before the war broke out was NIS 60 billion. How much will it be in 2025? In practice, the answer is that any number wins. "This is a question involving many variables and high volatility, particularly as security situations are unforeseeable. At present, the estimate is NIS 117 billion, and that if the war becomes more intense, we will have unexpected expenditure of another NIS 7.5 billion," Gradus said.
Promised US aid amounts to $8.7 billion, of which $1 billion is for a project that will not affect the budget," Gradus said, adding, "There’s an agreement with the US signed under Obama that is valid until 2028, but you know what Trump thinks about aid."
Asked about the fiscal deficit as a proportion of GDP in the coming year, Gradus admitted that it would be higher than forecast, but said that it would not necessarily affect economic policy of the make-up of the budget. "Whether we end the year with a deficit of 3.9% or 4.8% of GDP is not what’s important; what’s important is the future graph of the deficit," he explained. The main aim, he says, is to keep the deficit reasonable, so that, in the long-term, the debt to GDP ratio will decline. "The budget for the past two years was meant to contain a NIS 30 billion deficit. We are now on NIS 230 billion in two years," he said.
Main focus: taxing undistributed profit
You said that if one measure fell, you would replace it with another. But that is not what happened. You talked about closing ministries, and it didn’t happen. Is the budget disintegrating?
"Closing ministries is a few hundred million. It’s a matter of the government’s message and responsiveness and a proof of seriousness, but yes, it’s not happening. I don’t like the disintegration. The main challenge is taxation of undistributed profits. There are a lot of eggs in that basket. In the coming weeks it will come up for debate. That’s where the main focus is."
Asked by Oren Dori whether revenue form this source can really reach NIS 10 billion annually, Gradus responded: "We made very conservative assumptions. The surtax will also rise by another 2%. If anyone is thinking about distributing profits, this is a good time to do it. If this measure is not approved, it will be very difficult politically to pass alternative measures, such as raising interest rates. So in my opinion the measure will be approved, perhaps with changes."
Lack of competition in banking
Aren’t you worried about tax planning?
Gradus: "We are aware of possible tax planning moves, and we’re trying to preempt them. But even if there are tax planning steps that we don’t think of now, we will be able to fix the situation in the following year. If we can take just 2% of the money that there is, we’ll obtain much more than NIS 10 billion. We used conservative assumptions. We’ll get to the solutions. Even if it’s not ten billion but nine billion, we’ll cope."
Later in the discussion, Gradus talked about the financial system and concertation in the market. "There isn’t really concentration in the financial institutions market, but if they want to set up a committee then let them do so and we’ll learn from it. But there is a lack of competition in the banking system," he said. He pointed out that 94% of the credit for small and medium-size businesses comes from the banks, and said that the Ministry of Finance was considering steps to introduce competition in the market for deposits and credit for businesses. "The banks aren’t passing on enough of the rise in interest rates to deposits, and that is problematic for competition," Gradus said, adding, "We want to introduce entities that will take deposits and offer attractive interest rates, and offer the money as credit to businesses."
Not happy with the budget
What will you answer to someone who says that the austerity measures are imposed on the working person and that the budget does not contain enough growth engines?
"I’m not happy with this budget, not because of the budget program, but because we don’t like taxing citizens and giving the money to the defense establishment. If you had told me this a few years ago, I would have said that it was my nightmare. But it’s dictated by the security situation, and that has to be financed. We tried to structure the ‘decrees’ in an egalitarian and economically beneficial way, but the political constraints change the professional stance. When the war is over, we’ll be able to look ahead. There are infrastructure projects amounting to NIS 400 billion that we want to carry out, and our attention has to be focused on them."
Gradus concluded by expressing concern about the education system. "Israel has a major education crisis," he said. "The scores of Israeli students indicate a sharp decline, especially in certain sections of the population." He said that 50% of the pupils currently in grade one were Arabs and haredim, and that without solutions to deal with these educational challenges, it would be hard to ensure long-term economic growth.
The Globes Investment Conference is held in cooperation with Migdal, Bank of Jerusalem, Pagaya, and Profimex.
Published by Globes, Israel business news - en.globes.co.il - on November 18, 2024.
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