Israel: Selected Issues

IMF Staff Country Reports, May 1, 2018

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The paper analyzes the macro-fiscal implications of an increase in infrastructure spending, considering Israel’s dual economy character.
Growth benefits from increased infrastructure spending will likely be insufficient to prevent a significant increase in public debt ratios.
Allowing the public debt ratio to rise as much as 10 percentage points appears too high given Israel faces wider uncertainties than most advanced economies.

The efficiency of investment is key to ensuring growth benefits are achieved and to containing increases in the public debt ratio.
Selecting projects with low rates of return, managing public investment inefficiently, or raising investment faster than absorptive capacity can lead to weaker growth benefits and higher debt ratios that reduce the room to sustain increased public investment.

A significant increase in debt ratios is likely unless accompanied by offsetting measures.
Israel should preserve fiscal space to facilitate structural reforms for long-term growth.
Given Israel’s wider uncertainties relative to most advanced economies, a rise in the public debt ratio of up to 10 percentage points is judged too high.

The paper indicates a need for revenue measures to accompany higher public investment.
Reductions in tax benefits are preferable among revenue measures.
Israel’s sizable foregone revenue from various tax benefits—around 5 percent of GDP per year—suggests significant scope for revenue gains.
The analysis suggests that reducing tax benefits is least detrimental to growth, which would be most positive for debt dynamics.

Finance most of the additional investment with additional revenues, given Israel’s very low civilian spending.
Prioritize selecting high-return projects and improving public investment management to enhance growth benefits and limit debt increases.
Sequence investment increases in line with absorptive capacity to avoid inefficiencies and weaker growth outcomes.
Use reductions in tax benefits as a preferred revenue source because they are assessed to be least detrimental to growth and most supportive of favorable debt dynamics.

International Monetary Fund. Israel: Selected Issues. May 1, 2018.