2. ECONOMIC POLICY IN 2000-2002
2. ECONOMIC POLICY IN 2000-2002
1. General
Economic policy for the year 2000 has been planned to enable the expansion of economic activity to a higher level consistent with sustainable growth.
Fiscal policy will attain this objective by means of two main instruments-structural changes in the various principal industries and the National Budget. Each of these rubrics involves a very long series of decisions, deriving from a swathe of economic and social considerations. Underlying all the decisions is the desire to improve economic efficiency, reduce public-sector involvement, and increase competition. The last serves not only to lower consumer prices but also to reduce production costs, improve profitability, and reinforce the motivation to invest and grow in the competitive international environment in which we operate.
In making decisions about the size of the budget, significant weight has been given to the commitment to continue reducing the extent of both the government budget as a share of GDP and the budget deficit. The size of both these parameters in 2000, as well as the decision as to their size in the future, has a significant impact on the price of loans to both the public and private sectors.
In order to rationalize direct taxation, while making the system consistent with the changing domestic and international economic environment, reforms in this area will be crystallized this year.
The rest of this chapter describes the guidelines underlying economic policy for 1999 and 2000.
2. Budgetary policy
In the budget proposal submitted to the Knesset, expenditure (excluding repayment of principal and credit extended) totals NIS 188.9 billion, and total revenue (excluding credit repaid) is NIS 178 billion. The resulting total planned deficit (excluding credit) is NIS 10.9 billion-2.5 percent of the nominal GDP forecast for the year 2000.
In order to utilize the growth potential of Israel's economy (4-4.5 percent), based primarily on the achievements of the business sector, a reduction of the government's economic involvement is required. Government policy, as expressed in the framework of the National Budget for 1999, will consequently be based on two major planks:
1. The gradual reduction of the budget deficit as a proportion of GDP, relative to the deficit forecast for 1999. A smaller budget deficit will contribute to business-sector stability and make it easier for that sector to raise investment capital.
The total budget deficit for 1999 (excluding credit) is expected to be 3 percent of GDP-a deviation of about 1 percent from the target set in the Budget Deficit Reduction Law. The deviation results from a shortfall in revenues (from taxes and other sources), due inter alia to the economic slowdown.
As a result, the government decided to amend the Budget Deficit Reduction Law and set a new path according to which the total budget deficit (excluding credit) for the year 2000 will not exceed 2.5 percent of GDP (below the estimated deficit expected for the year), the deficit for 2003 will not exceed 1.5 percent of GDP, and for each of the years 2001 and 2002 it will decline by at least 0.25 percent. The government would thus transmit a vital message regarding its determination to reduce the budget deficit.
2. The continued gradual reduction of government expenditure as a proportion of GDP, in order to free up sources for the business sector. Government expenditure as a share of GDP in Israel is higher than the accepted rate in western countries, and hence the importance of continuing to lower it. The proposed budget for 2000 expects government expenditure to fall to 46.3 percent of forecast GDP (at budget prices) in 1999 and 45.5 percent in the year 2000.
In order to reach these targets, the government must approve budgetary adjustments involving a long series of topics and amounting to NIS 5 billion. NIS 350 million (net) of this will be obtained by increasing the excise tax on transport diesel fuel, bringing the tax rate on this fuel into line with that on gasoline for transport, and making the tax rate on other diesel fuel consistent with that on other fuels used for generating energy. NIS 450 million will be obtained by raising the ceiling on employees' National Insurance and health contributions from four to five times the average wage.
In 1999 government tax receipts are expected to constitute the same percentage of GDP as in 1998-31.3 percent-lower than the level attained in 1994, when it was 32.9 percent. For some time now taxation policy has veered between the need to raise additional sources in order to finance public expenditure and the desire to reduce tax rates and thereby stimulate economic growth. In 1997-99, because of the extent of the budget deficit, the need to bolster revenue was greater, though the other aim was not abandoned, and the Treasury began planning extensive reforms of direct taxation. The Minister of Finance announced the appointment of a public committee to discuss and finalize the details of the reform during the year 2000.
3. The composition of the budget and structural changes
The proposed budget for the year 2000 includes suggestions for reducing the current expenditure of the civilian government ministries, lowering defense expenditure, and cutting transfers. On the other hand, the budget proposal increases the extent of investment in the transport infrastructure. This will enlarge the scope of transport investment in the national budget from NIS 3.1 billion to NIS 3.6 billion. The increment is intended to intensify investment in roads, railways, and public transport.
Over and beyond this, it is expected that in the year 2000 the business sector will undertake work amounting to NIS 850 million on the Cross Israel Highway, so that relative to the budget expenditure on this item in 1999, transport investment is expected to increase by 40 percent in 2000. The expansion of infrastructure investment serves to stimulate growth, not only through the increased economic activity involved in the actual implementation of projects but also through the expansion of the advanced physical infrastructure which is a precondition for the development of the business sector. In addition, the government intends to bring about the implementation of the following structural changes in various industries:
In communications, the government will open up the sphere of domestic communications to competition, and issue tenders in 2000 for licenses to provide wireless personal communications.
In energy, a timetable has been set for incorporating private manufacturers within the areas of electricity generation and allocation. In the fuel segment, it is suggested that the oil refineries be split into two competing firms, and that the establishment of small fuel stations also be promoted.
In transport, it is suggested that action be taken to change the structure of the ports, organizing them as three profit centers. The Ports Authority will thus issue a tender for the construction of the Jubilee Port in Ashdod, and projects in the area of public transport and mass transportation will be developed.
In water, drilling for water will be opened to competition, and legislation regarding water and sewage corporations will be promoted. This is intended to create a closed structure for municipal water and sewage schemes that will operate on a business basis, thereby making borrowing possible in order to develop the infrastructure.
4. Government policy on wages and the labor force
During 1999 negotiations were held for the renewal of the public-service wage agreements, alongside the government's adherence to the policy of maintaining the level of the real wage and granting only moderate wage increases. This principle was adhered to in the wage agreements that were signed in the course of 1998 and 1999 with the General Federation of Labor (Histadrut), teachers, university teachers, and other public-sector organizations.
In the agreement signed with the Histadrut a wage increment of 4.8 percent was granted for 1998 and the last quarter of 1997, and separate agreements were signed for each professional wage grade. Negotiations for agreements for 1999 and 2000 will soon be held.
The approximate level of the real wage in the public sector was maintained in 1998 (a real increase of 0.3 percent), and it is assessed that it will rise in 1999 as a result of the introduction of the wage agreement for 1998. The wage agreements for the next few years will likely reflect the government's continued adherence to its policy regarding the real wage, and that these agreements will be adapted to the declining path of inflation while reducing elements that serve automatically to raise nominal wages ('wage drift').
In the wake of the government's 1997 decision to set up a mechanism for implementing paragraph 29 of the Budget Foundations Law (which stipulates that budgeted entities cannot change the wage or retirement terms of their employees beyond what is the norm for all civil servants), an enforcement unit was established in the Wages Division of the Ministry of Finance. Its task is to coordinate the activity required to enforce the law, including submitting claims on behalf of the state in all matters relating to annulling agreements, arrangements, and wage deviations, and bringing offenders to trial. Operating in conjunction with the State Attorney's Office, the enforcement unit uses its authority to tighten control over budgeted entities, in particular municipalities, and prevent deviations.
5. Deficit financing and capital-market policy
This year, too, the financing of the budget deficit will be based mainly on domestic financing and privatization proceeds. The trend towards increased liquidity and negotiability in the government-bonds market will continue. Within the framework of this policy, the sizes of the series issued to the public have been increased in the last year, and unindexed, variable-interest, 10-year bonds have begun to be issued. In the year 2000 the Ministry of Finance intends to raise some NIS 5.7 billion on the domestic market.
Borrowing abroad is expected to amount to $ 2.45 billion, divided up as follows: some $ 850 million through the Israel Bonds Organization, about $ 600 million on the capital and financial markets-as negotiable State of Israel Bonds and/or bank loans-and the remaining $ 1 billion from the remaining balance of the loan guaranteed by the US government. Total payments to abroad are expected to amount to $ 1.95 billion, so that total planned financing abroad is about $ 500 million, i.e., some NIS 2.2 billion. The policy of diversifying sources of capital expresses the continued efforts of the Ministry of Finance to build up an infrastructure in the international markets, as borrowing under the US government guarantees comes to an end. Planned privatization proceeds of NIS 3.5 billion will complete the sources required to finance the deficit.
The policy aimed at improving and expanding the information available to the public regarding institutional investors will be continued this year, requiring more detailed reports to be submitted to the public and to participants in funds. In addition, the investment rules affecting these investors will be liberalized further. In the area of pension savings, the regulation of activity will continue, alongside the intensification of supervision and competition. In the sphere of insurance, the implementation of the new arrangement for the insurance of borrowers by mortgage banks will continue, increasing competition and proper disclosure in this area. The preparations for introducing a new system of compulsory vehicle insurance will continue, in accordance with the decision of the Knesset.
6. Monetary policy
Israel's current inflation environment is significantly lower than it has been in the past. This constitutes a pivotal element in the process of Israel's integration into the global economy and in progressing towards the goal of sustainable growth. The government has decided on an inflation target of 3-4 percent in 2000 and 2001.
According to current assessments, the rate of price increases is expected to be below 4 percent in 1999. This is mainly the result of a fall in prices attained at the beginning of the year due to the Bank of Israel's policy at the end of 1998; the decline offset part of the steep increase at the end of 1998, when it was accompanied by sharp local-currency depreciation against the backdrop of world financial shocks. Nonetheless, the expected inflation environment for the next year or so is still somewhat above the rate that is consistent with the government's targets-a situation that embodies inflationary risks.
The Bank of Israel will act in 2000 and 2001 to attain the inflation target set by the government (3-4 percent), as this will enable the economy to progress towards the price stability evident in western countries. In the long run, monetary policy aimed at attaining the inflation targets constitutes the most efficient way of progressing towards fulfilling Israel's growth potential in order to achieve sustainable growth. This is particularly the case in view of the financial and economic crises that have affected many emerging economies in recent years, emphasizing the importance of reaching economic stability.
