On the eve of submission of the 2002 budget for approval, the top management of the Finance Ministry gave the financial press several briefings. The Finance Minister and his director-general spoke of the outlines of the new economic plan, of its need for public support and of the great importance of budget cuts. In between he managed to sneak in an ominous piece of news: the budget deficit for 2001, his first year in office, will come to 4.6% of the GDP, a far cry from the 1.75% target set by the government's reduced deficit law.
The new 4% deficit is a major leap not just when compared with the original budget target but also when compared with the estimate given only three months earlier by Finance Ministry director-general Ohad Marani. In an interview on his first day in office, Marani estimated the budget deficit in 2001 will come to anywhere between 2% and 2.2%.
When asked if that prediction was not overly optimistic, Marani's answer was: "I think we are on steady ground when we estimate recovery and growth of 4% for next year."
A month has gone by since the estimate was hiked from 2% to 4%, and yesterday the treasury posted the updated data. The government budget deficit in 2001 will come to 4.6% - 0.6%, or NIS 2.8 billion more than the 4% predicted. Altogether the deficit in 2001, unless other surprises are in store, will come to NIS 21.3 billion.
Accountant General Nir Gilad yesterday proudly said that the budget variation stems from an enormous reduction of revenues from taxes. As far as expenses are concerned, the ministry met its goals to a tee. We are not sure why he is so boastful. Gilad knows that any money manager in a big corporation would get the immediate sack were he to say the company met its expenditures goal, it was just the revenues that slipped.
On the face of things, the people at the Finance Ministry have an excellent alibi. They could not predict the events of September 11, the cause of the current global and local economic slowdown that led to the dwindling of tax revenues. But in reality, the attacks can only explain a small par of the great budget deficit.
As early as the first half of 2001, the writing was on the wall. The Israeli market went into lower gear because of the Intifada and the bursting Wall Street hi-tech bubble. Everyone knew tax revenues would have a delayed six month to one-year response to the slowdown, as they always do.
But treasury officials preferred to ignore what was going on and hope for better days. Instead of calling for dramatic cost cutting in 2001, they boasted about the steady revenues from taxes, at a level that allowed them to count on 4% growth in 2002 when planning the budget for that year.
One man was asleep at his post guarding the ministry's officials. Bank of Israel Governor, David Klein, once a true militant as far as meeting deficit goals was concerned, was a lot more lenient towards the ministry's forecasts in 2001. This was at least partially because the bank itself also failed to predict correctly, and did not gain a good enough grasp of the depth of either the local or the global recession.
The denial policy adopted by the ministry and the Bank of Israel in the last six months is one of the reasons why the ministry is having so much difficulty making the necessary budget cuts today. Even if the ministry manages to make the full cut in the budget without raising taxes, the deficit in 2002 will still end up at about 3%, if we're lucky, and 4%, which is more likely.
The year 2001 will be written down as one of the worst years in Israel's fiscal history. The last year when such a high deficit was recorded was 1996. It is no accident that both 2001 and 1996 were the first years a new government was in power. New governments don't mind giant deficits on their first year: they simply blame the previous government for the bungle.
This is just the time to recall how the Netanyahu-Meridor government exceeded its deficit goal in 1996, but worked determinedly to reduce it in 1997 and 1998. If Ariel Sharon and Silvan Shalom don't come to, the deficit in 2002 will be almost like that in 2001, and they won't have anyone to blame but themselves.