Israel Draft Budget for Fiscal Year 1999

Part2

GENERAL REVIEW

THE 1999 BUDGET POLICY

Size of the Budget

The total State Budget for 1999 is NIS 215 billion.

The operations budget, including revenue-dependent expenditure, is NIS 223.1 billion.

The expenditure budget not including debt servicing (principal) is NIS 183.3 billion..

Budget expenditure constitutes 46.5 percent of the predicted Gross Domestic Product.

Goals of the Budget

The economic policy of the Government, as expressed inter alia in the 1999 Budget Proposal, intends to stimulate economic growth and employment.
In the past three years, the annual growth rate of the GDP has decreased each year relative to the previous year.
The Government has resolved to take several actions to create conditions in which the business sector will more conveniently raise its level of activity and thereby stimulate growth of product and employment.
The principal measures of the proposed policy for 1999 are spelled out below in three major respects: the budget framework, expansion of investments in infrastructure and vocational training, and changes in the labor market. The fourth section describes seven matters emphasized in the present Budget Proposal.

The Budget Framework

Reduction of government involvement in the economy will enable the business sector to develop more easily and place the economy on a stronger growth trajectory. To accomplish this, the Government will rest its policy with respect to the framework of the 1999 State Budget on four main pillars:

	Continued gradual reduction of the budget deficit as a percent of Gross Domestic Product-to help the business sector raise money for its investments, to attain price stability, and to improve the balance of payments, among other goals. In accordance with the Deficit Reduction Law, the total government deficit (not including allocation of credit) is to decrease from 2.4 percent of GDP in 1998 to 2 percent. By adhering to this trajectory, the Government signals the business sector in Israel and abroad that its policy is consistent and stable. Such a message is of vast importance, especially in view of the instability that has recently become typical of no few international markets.
	Continued gradual downscaling of government expenditure relative to GDP, in order to assist the business sector. The more vigorously the public sector downsizes itself, the better the state of the business sector will become. The importance of persevering in reducing this variable is explained by Israel's high share of government expenditure in GDP by Western standards. The 1999 Budget Proposal envisages a decrease in this indicator from 47 percent in 1998 to 46.5 percent in 1999.
	Continued gradual reduction of the ratio of government debt to GDP, from 105 percent in 1998 to 104 percent in 1999. This trend is needed because Israel has an unusually high ratio of government debt to GDP by Western standards (such as the 60 percent figure allowed by the Maastricht Treaty). The downtrend is also easing, to a growing extent, the interest payments that burden the State Budget. The downsizing of the government debt burden is abetted by the falling share of the deficit and the funding of much of this deficit (NIS 4.6 billion) with revenue from privatization of state-owned corporations and banks.
	Avoidance of increases in the tax burden in 1999. The budget makes this possible by allowing only a moderate upturn in government spending (although enhanced tax collection and efforts to assure honest tax payments may raise the burden slightly). Resolve in containing the tax burden-and reducing it in the long term-an increase in the tax burden may be harmful to growth processes.

Expansion of Infrastructure Investments

In addition to its resolutions concerning the overall size of the 1999 Budget Proposal, the Government decided to reallocate the budget by reducing various current expenditures and significantly increasing investments in infrastructure.
Expansion of infrastructure investments will help enhance growth not only by stimulating activity in the performance of the infrastructure jobs themselves but also by augmenting the advanced infrastructure that the business sector needs to sor its development more quickly.
The Budget Proposal provides an increase of nearly NIS 1 billion in government infrastructure investments relative to the original 1998 budget.
Most of this increase is earmarked for investments in transport, which will climb to NIS 3.1 billion-30 percent larger than the original 1998 budget-and NIS 800 million in water and sewage investments, 50 percent larger than the original 1998 budget. The investments in water and sewage infrastructure are part of a multi-annual plan meant to help private developers invest their own funds in delivering treated effluent from treatment facilities to farming areas. Implementation of this plan will support the long-term changeover to greater use of treated effluent in agriculture. This will conserve potable water, which can be reallocated for household use as the population grows.

As the Government increases its investments in infrastructure, nongovernmental organizations are expected to augment their investments by NIS 3 billion, a 20 percent increase over their investments in 1998. The investors in this case are various kinds of corporations- state-owned, statutory, and other-that generate the main part of investment in several types of infrastructure such as electricity, communications, transport (overland, maritime, and air), water, and sewage.
Some of the increase in nongovernmental organizations' investments originate in the maturing of projects that are ready for performance in 1999, such as Terminal 2000 at Ben-Gurion International Airport, the Cross-Israel Highway, and North Ashdod port. Others are the results of the introduction of competition in additional areas of infrastructure.
The experience gathered in the past few years shows that as various infrastructure domains are opened to competition, demand for the relevant services grows steeply. Thus, apart from the benefit that the public gains-significantly lower prices and better service- infrastructure investments in the competitivized fields grow perceptibly in order to meet the soaring demand.

An estimate based on comparison of the demand trends before and after the introduction of competition shows that competition in mobile phones and international dialing has-as of the end of 1998-increased investments relative to the pre-competition situation by cumulative sums of NIS 6 billion and NIS 800 million, respectively.
This trend is expected to gather even more momentum when competition in domestic fixed telecom is introduced in early 1999. This measure will result, among other things, in large investments in band-width communications that both businesses and households need badly. Additional measures-such as competition in multichannel television transmissions, bid invitations for private producers of electricity, and integration of private players in distribution of electricity on customers' premises-are expected to boost investments to even higher levels.
The competitivization of these and other fields is part of the Government's economic policy, which is aptly articulated in resolutions the Government adopted as it debated the 1999 Budget Proposal.
The Budget Proposal also includes an increase of NIS 260 million (relative to the original 1998 budget) in R&D investment grants for businesses. These grants will be targeted for enterprises that need government support to make the investment.

Vocational Training and Changes in the Labor Market

The economic slowdown is evident in labor market. In 1998, growth of the civilian labor force continued to outpace net job creation, resulting in a higher unemployment rate.
One of the most important tasks of government in such a situation is to take action in the field of vocational training that will reconcile, to the extent possible, the level and skills of jobseekers with the requirements and needs of the economy.
Accordingly, the Government resolved to expand vocational-training programs for the employed by 30,000 places, at cost of NIS 100 million. The resolution stresses in-plant training and assures the unemployed the freedom to choose the type of institution that they will attend for their training, among those approved by the Ministry of Labor and Social Affairs. Thus, a higher proportion of the graduates of vocational-training courses are expected to find jobs in the fields in which they were trained.
In the high-tech industries, degree-holders in electronics and computers are still in perceptibly short supply. This shortage often creates a bottleneck that stops these enterprises from expanding their activity and, for this reason, thwarts the hiring of less skilled workers. Therefore, the Government resolved to offer a special program, in conjunction with the Council for Higher Education, substantially to increase enrollment in degree programs in electronics and computers. The intention is to double the number of degree recipients in the relevant fields within four years.

Apart from these changes in vocational training, the Government resolved to take additional actions with respect to the labor market, including:

	Encouraging the unemployed to return to the labor cycle and mitigating abuse of eligibility for unemployment compensation among some of the jobless.
	Easing the burden on enterprises in labor-intensive traditional industries that have relatively high share of minimum-wage earners-by linking the minimum wage to the Consumer Price Index instead of the national average wage for the next two years.

Two reasons for the rising level of the average wage are the ongoing economic restructuring-in which traditional industries are giving way to more advanced industries that offer higher wages-and the shortage of labor in occupations in demand. When the increase in the average wage is applied to those who earn the minimum wage, the resulting burden on businesses' outlays may cause enterprises on the borderline of profitability to shut down-to the detriment of the less skilled workers of all people, who find themselves jobless.
The Government wishes to extend this method of indexation to the wages of the highest echelons of public servants for the next two years.

Further Emphases in the Budget Proposalt

Increasing the Defense Budget

The 1999 defense budget was given an increase of NIS 670 million relative to the 1998 budget in order to improve the army's preparedness for various security threats. Concurrently, the defense system has been instructed to make efficiencies and incurred an NIS 300 million budget cut in matters that do not harm military preparedness.

Preparations for Tourism in 2000

The year 2000 presents an opportunity to boost incoming Christian pilgrimage tourism substantially. To bring this about, the Government has girded to expand its tourism investments significantly in order to serve large numbers of tourists. Marketing budgets have also been increased in order to advertise Israel's unique features among the relevant population groups.

Immigrant Absorption

The 1999 Budget Proposal was prepared on the basis of an estimate of 60,000 immigrant arrivals in 1999. However, the Government is prepared to accommodate a larger number of immigrants. If this welcome development comes to pass because of the situation in Russia, the State Budget will fund these plans to the extent necessary.

Enhancing Competitiveness and Lowering Prices

Enhancing the economy's competitiveness helps stimulate growth both by making the business sector more competitive vis-a-vis its rivals and by increasing households' purchasing power.
In 1999, the Government intends to stimulate competitiveness in many fields, including distribution of gas from central facilities to homes, motor-vehicle imports, public transit, the dairy and beef cattle industries, various industrial products, and pharmaceuticals. (For a more detailed description of competition in communications and energy, see the section on "Boosting Infrastructure Investments," above).

Streamlining the Public Sector

In its 1999 budget debates, the Government resolved to carry out structural changes in the public sector in order to streamline the work of governmental and public institutions-including the health system, the education system, and municipal government.

Structural Changes in Housing

In housing, two main changes are proposed:

Establishment of a framework for "clear and build" projects, within which old neighborhoods can be revitalized, density in city centers increased, existing infrastructures put to better use, and residents' housing quality improved. The proposed changes are meant to facilitate the performance of such projects, which often run into difficulties at the stage of performance. Under the current circumstances, projects of these types may encourage construction activity and, thereby, stimulate employment and growth.

Creation of conditions that will facilitate the development of a secondary mortgage market. By making the mortgage market more versatile, this measure, too, may affect and stimulate activity in the construction industry.

Changes in the Capital Market

The Government and the Securities Authority will take action in 1999 to facilitate corporate issues in the domestic market-by setting rules for issues of corporate debentures, simplifying the prospectuses of mutual funds, and making it easier for companies to raise capital by means of concurrent issues in the domestic and the American capital markets, among other measures.

ANALYSIS OF THE BUDGET PROPOSAL

Budget expenditure in 1999, not including servicing of debt principal in constant prices, is 1.4 percent higher than in the original 1988 budget. The total State Budget for 1999, in constant prices, is about 0.8 percent lower than the original 1998 budget. Tax revenues are expected to increase by 2.9 percent in real terms relative to expected revenues in 1998 (not including the results of collection enhancements).

Expenditure

Below are the main expenditure-side changes in the 1999 Budget Proposal, expressed in real terms, relative to the original 1998 budget:
Total expenditure, including servicing of debt principal, will decrease by 0.8 percent-mainly because of a 9 percent decline in servicing of debt principal and a 2.7 percent decrease in the allocation for interest.
Civilian consumption will rise by 2 percent, mainly because of budget increases for social-service ministries-foremost Health, Labor and Social Affairs, and Immigrant Absorption.
Defense consumption will rise by 1.9 percent as a consequence of the Government resolution to enlarge the defense budget in 1999.
Transfers to individuals, institutions, and municipal authorities will rise by 0.8 percent because of a 2.2 percent increase in funding of National Insurance benefits and a 13 percent increase in benefit outlays for persons persecuted or disabled by the Nazis-prompted by legislative changes.
Interest payments will decline by 2.7 percent as a result of the structure of the debt-repayment schedules.
Repayments of principal will decline by 9 percent, chiefly because the payback of savings schemes deposited with the Treasury has been completed.
Allocation of credit will increase by 13.2 percent, chiefly because of the adjustment of government housing loans.

Revenue

Estimated state tax revenue 1999 will grow by 2.9 percent in real terms relative to expected revenue in 1998 (not including the results of collection enhancements) because of GDP growth and legislative changes (for details, see Part D below).

State Budget Deficit

The total deficit in the 1999 State Budget, not including net allocation of credit, will be NIS 8.0 billion, representing a decline from 2.4 percent of GDP in the 1998 budget to 2 percent of GDP in fiscal 1999.
The domestic deficit in fiscal 1999, not including net allocation of credit, will be NIS 10.4 billion-2.6 percent of GDP. An expected surplus of NIS 2.4 billion in activity abroad-0.6 percent of GDP-should be subtracted from domestic deficit.
The total deficit in 1999 will be NIS 8.1 billion.

Funding of the Total Deficit*: 1999(NIS billions)

Estimated revenue from sale of companies in banks	4.6
Overseas borrowing (net)	0.9
Borrowing from the public (net)	2.6

* Substitution may occur among various components in funding the deficit.

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