According to the latest forecast, Israel’s economy is expected to grow by 2.7% in 2023, a decrease compared to the previous projection of 3% published in January. State revenues are now estimated to be NIS 463.6 billion, which is NIS 5.3 billion lower than the previous forecast.
The revised forecast takes into account the assumption that the judicial overhaul legislation will not be passed in its original form. The potential passage of the legislation is considered a risk to the forecast, with the potential to exacerbate the figures. Nonetheless, the Ministry of Finance has factored in the cost of the uncertainty surrounding the legislation. Among other factors contributing to the more pessimistic forecast is the global economic slowdown, particularly among Israel’s major trading partners in Europe and the US.
The decline in state revenues will result in a larger fiscal deficit. The upcoming state budget, set to be approved next week, is based on the assumption of a very low deficit of 0.8-0.9% of GDP for 2023 and 2024. However, based on the new forecast, the deficit is projected to increase to 1.1% of GDP this year and 1.35% next year.
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Despite the larger deficit, it is important to note that the new forecast remains considerably lower than the deficit projected by market analysts, who estimate a deficit of 2.5-3.5% of GDP.
The two-year budget for 2023-2024 was approved by the government in February, with revenues forecasted to be NIS 16.2 billion higher than the recently released forecast. The decline primarily occurs in 2024, where revenues are now expected to be NIS 11 billion less than the original forecast. In nominal terms, state revenues for this year are expected to be 0.9% lower than the previous year.
The Ministry of Finance emphasizes the need for fiscal restraint in light of the signs of economic slowdown, particularly in the technology and real estate sectors. Greenberg writes, “Most of the risks to the forecast are on the downside, and the probability of their materialization is higher in this forecast. It is therefore important to maintain fiscal flexibility to address future changes in the growth projection.”
Furthermore, the updated forecast does not bring good news for inflation either. The inflation forecast has been revised upward to 3.2% for this year, an increase of 0.4%, and 2.9% for next year, a rise of 0.2%.
In fact, the inflation forecast could have been slightly higher, considering the April Consumer Price Index (CPI) reading released yesterday, which revealed surprisingly high inflation of 5%. The Ministry of Finance had based its forecast on the assumption of current annual inflation at 4.9%.
