The government voted to approve an increase in the state budget's deficit target for next year. Deficit spending is to be raised from 3% in the 2012 budget to 4.65% in the budget currently under negotiation, for 2013-14.
The figure represents a compromise between Finance Minister Yair Lapid and the Bank of Israel. Lapid had sought a 4.9% target, which was sorely opposed by BOI chairman Stanley Fischer. Lapid claimed that it would be impossible to complete the budget without the increase in deficit spending, and the two agreed on the 4.65% target. The compromise means that the budget deficit will be some NIS 4 billion lower than Lapid had planned for.
The BOI has been very concerned with demands for deficit spending increases – and with good reason. Fischer has long feared that increasing the deficit target would result in a negative reaction by ratings agencies, and indeed he was proved to be right, as ratings agency Standard and Poors lowered Israel's local-currency credit rating. Lapid said that the cut was to be expected, but by the time the next budget came around, Israel would be able to dispense with deficit spending.
Speaking at the government discussion of the issue Sunday, a BOI official said that while the rating cut was regrettable, the compromise on the deficit target showed the government's goodwill in attempting to rein in spending. Many members of the financial establishment, including top bankers and economists, are said to be fuming over the way Lapid handled the issue, believing he could have avoided the ratings cut.