PM Benjamin Netanyahu<span style="font-weight: normal;"> (right)</span> and Finance Minister Bezalel Smotrich

Why Israel's deficit is actually $11 billion larger than reported

According to Prof. Momi Dahan, the deficit in 2024 is much larger than the one shown in the budget book, standing at NIS 170 billion ($47 billion) and making up 9% of GDP

"The real deficit in the state budget for 2024 is about NIS 40 billion (approximately $11 billion) larger than the deficit shown in the budget book that was placed on the Knesset table. That is, the real deficit is about NIS 170 billion ($47B) and close to 9% of GDP in 2024. This means that that the volume of loans that the Israeli government will be required to raise in the coming year is NIS 40 billion greater,” says Prof. Momi Dahan, a at the Federmann School of Public Policy and Government at the Hebrew University of Jerusalem, and its director between 2011-2014.
2 View gallery
בנימין נתניהו ראש הממשלה בצלאל סמוטריץ שר האוצר
בנימין נתניהו ראש הממשלה בצלאל סמוטריץ שר האוצר
PM Benjamin Netanyahu (right) and Finance Minister Bezalel Smotrich
(Credit: Haim Zach/GPO)
Dahan emphasizes that "this is one of the important roles of the information contained in the deficit: it should provide information on the scope of the funding required by government." Dahan, who has served as a member of the National Insurance Council since 2020, analyzed the state budget for 2024 since its official publication a few weeks ago and found two sources that explain the gap he is talking about: the first, an off-budget expenditure of NIS 23 billion for the payment of compensation to households and businesses following property damage and loss of income related to the war (compensation fund); and an underestimation of about NIS 17 billion in the net expenditure of the National Insurance, an "unprecedented amount" as he defined it.
As mentioned, the first source is the so-called "compensation fund". According to Dahan, in 2007 the Israeli government created an off-budget fund, whose revenues come from property tax and purchase tax and are supposed to be the source of payment of compensation for war damage, known as the compensation fund (property tax). "The logic was to reduce the fluctuations in the budget deficit shown in the budget book by a registery reduction of the income from property tax and purchase tax, in an amount that is transferred to a compensation fund, and on the other hand, the compensation will not be recorded as an expense for the payment of compensation for war damage," explains Dahan. That is, the expenses of the compensation fund are not counted for the purpose of deficit, but they are counted for the purpose of calculating the debt. However, according to him, "Such a fund can be used for many components of the budget. For example, the extent of unemployment is affected by war, and it would seem to be justified to establish a similar fund. As we unfortunately discover, health expenses also increase during wartime to treat the many victims. Establishing an unemployment fund or a health fund for all the components that are affected by the war would have emptied the state budget," he tells Calcalist.
Dahan says that this method of registration is contrary to international guidelines according to which the Central Bureau of Statistics (CBS) calculates the total budget deficit. And for reference: the treasury indicator presented a deficit of 4.2% of GDP for 2023, while the updated permissible ceiling for that year stood at 3.7% of GDP. However, the Central Bank published a different and much higher deficit estimate of 5% of GDP. This is a gap of almost NIS 15 billion ($4B) compared to the deficit presented by the Treasury. This is a huge amount and of great significance in terms of the government's fiscal credibility.
In response to Calcalist's question, the CBS explained that the vast majority of the gap is explained by the inclusion of the compensation fund in the calculation of the deficit. "Extra-budgetary funds are part of the government sector according to the definitions of the international guidelines and therefore their activity must be included in the calculation," the CBS said.
Dahan, who previously served as a Senior Economist at the Research Department in the Bank of Israel, believes that the problematic registration of the compensation fund harms the transparency of the budget due to the difference between the depth of the deficit that appears in the state budget compared to the budget deficit according to the Bank of Israel. Furthermore, according to him, in recent years the compensation fund can no longer justify this behavior because "the ministers of finance exercised their discretion (given to them by law) and determined that sums of money should not be transferred to the fund in five of the last six years. In other words, the compensation fund became a tool for making up the budget deficit. "They did not officially transfer sums of money to the fund to make the budget deficit look better," he states.
2 View gallery
פרופ' מומי דהן
פרופ' מומי דהן
Prof. Momi Dahan
(Photo: Alex Kolomoisky)
Dahan's examination of the development of the fund shows that since 2017, only in 2021, during the tenure of the Bennett and Lapid government, was money deposited in the fund, and in all the other years between 2018-2023 the governments led by Benjamin Netanyahu did not allocate a single shekel to the fund. This, despite the fact that there were warnings about possible clashes with Hamas and Hezbollah. The reason for the non-provision is clear: the provisions that come from property taxes, as mentioned, are an important source of income for the government, and the provision for a compensation fund means an increase in the deficit. "This year, the justification for not including the expense for compensation for the purpose of calculating the budget deficit has been completely lost, even if we accept all the arguments in favor of an extra-budgetary fund because the expense for compensation in the years 2023-2024 is billions of shekels greater than the balance of the fund."
In 2023, the government used approximately NIS 7.4 billion ($2B) from the fund - 27 times the multi-year average expenditure since the foundation of the fund (approximately NIS 274 million), and therefore the issue of registering the fund jumped off the page for those who bothered to go through the updated budget numbers for the two years 2023-2024. Also in 2024, a very significant expenditure is expected - of about 23 billion shekels ($6B) - when only about 10 billion shekels ($3B) remain in the fund.
Dahan's second claim is that the Ministry of Finance provided an estimate that is 17 billion shekels lower compared to the National Insurance in regards to the expenditure for expected pensions in 2024 - "and this is the second reason why the real budget deficit is larger," explains Dahan. It is important to clarify that this is an issue that has implications for the budget deficit, but there is no claim by any of the parties - neither the Treasury, nor the National Insurance, nor Dahan - that there is a possibility that any allowance might not be paid. That is, all Israeli citizens will receive all allowances according to law. The question here is how they will affect the deficit.
According to the revised state budget for 2024, the payment of the debt to the National Insurance will amount to NIS 18.2 billion, while the loan from the National Insurance will amount to only 17.3 billion - an implied deficit of NIS 878 million. On the other hand, according to the National Insurance budget approved during December 2023 by Finance Minister Bezalel Smotrich and Labor Minister Yoav Ben Tzur, a budget deficit of more than NIS 13.6 billion is expected (a gap of more than NIS 12 billion). "It is reasonable to assume that the National Insurance experts are better at estimating the expenses and income of the institution. There is no incentive for National Insurance officials to provide an exaggerated estimate of the National Insurance deficit since it does not receive more or less resources as a result," says Dahan, emphasizing that the allowances on which National Insurance is entrusted will be paid independently of this assessment and it is only important for the extent of loans that the Israeli government will have to raise, and the associated costs.
From the conversations held by Calcalist both with Treasury officials and with National Insurance officials it appears that this is a discrepancy in estimates. The Treasury believes that the estimates provided by the National Insurance are "false" while the National Insurance strongly denies these claims and stands behind them. Furthermore, the National Insurance claims that the January data that has already been received is completely consistent with their estimates and not the Ministry of Finance's.
And this gap, between the reported deficit and the expected deficit, is far from a curiosity, according to Dahan: "Israeli experience shows that an exaggerated presentation of the budgetary situation is dangerous. Two decades ago, in the 2002 budget, the Ministry of Finance inflated the growth forecast and a false representation of a low budget deficit was created, while the real deficit was much bigger. As the real budget picture became clear during 2002, the public and investors lost faith in the government and the dollar exchange rate skyrocketed to 5 shekels to the dollar in May 2002. There were even reports of a possible collapse of a bank in Israel. If God forbid it becomes clear to the public that the real deficit for 2024 is NIS 40 billion larger, the reaction of the rating companies and the investors could exact a heavy price from Israel," says Dahan, who served from 1999-2001 as a Senior Economic Advisor to the Director General at the Ministry of Finance, Avi Ben-Bassat.
Following the inflation of the growth forecast in 2002, the rating agency Fitch threatened to downgrade Israel's credit rating. Fitch is also the one that put Israel's credit rating on negative watch last October and is expected to decide whether to downgrade it soon due to similar developments in the deficit. "That's why," concludes Dahan, "it is important to present the real deficit, and to make the necessary budgetary adjustments in advance so as not to discover in hindsight a deficit at a frightening level that would trigger a severe reaction."