According to Israeli economists, a 10 percent rise on the US
NASDAQ stock market average adds 0.2 percent to Israel's GDP,
as reported in Globes. NASDAQ has risen 21.5 percent
in the six months since August 2003. In accordance with this
formula the bull market in the US will add at least an
additional 0.5 percent to Israel's GDP in 2004 regardless of
other factors.
This added growth comes on top of the expected increase in
exports and foreign investment. Most forecasters predict that
the rise in Israel's GDP for the current year will be about
2.5 percent, and this is the number that was used in
calculating the government budget. If there is a greater
rise, that can be expected to bring a corresponding rise in
the tax receipts of the Israeli government, reducing pressure
on expenses.
If NASDAQ rises further, it could contribute 0.8 percent to
Israel's GDP, increasing the chances for Israel's exceeding 3
percent growth in 2004. In early March, the Ministry of
Finance will publish the first update of its 2004 growth
forecast, taking into account the improvement in the leading
economic indicators in late 2003 and the first quarter of
2004, which indicate a recovery in economic activity.
Senior financial officials in Jerusalem believe 3 percent
growth is achievable in 2004. They emphasize that the 2.5
percent growth forecast in the state budget is the lower
growth estimate for the year, and that 3 percent growth is
reasonable, and is not even the upper growth estimate.
Analysts and leading international investment houses are
divided about growth forecasts for Israel in 2004. The
Economist is the most conservative with 2.3 percent.
Morgan Stanley is one of the highest, predicting 3.2
percent.
Meanwhile, the government has to make cuts somewhere to give
money elsewhere. There are several places it wants to adds
funding, including the Defense Ministry and local
authorities, currently striking.
The government intends to finance part of the budget
increases to the Defense Ministry and local authorities by
taking money from the budget reserves of the various
ministries. The remaining funds will come from a new 5
percent across-the-board cut from all the ministries'
budgets. Minister Meir Sheetrit said it would be possible to
know exactly how much money will be slashed from each
ministry's budget only after the local authorities' crisis is
resolved.
The state budget has a general economic reserve, and a
reserve for the respective ministries. The general budget
reserve for 2004 was used up at the beginning of the year,
when Finance Minister Benjamin Netanyahu gave in to the
demands of three Likud ministers -- Dan Naveh (Health), Limor
Livnat (Education) and Ehud Olmert (Industry, Trade and
Employment) -- to increase their budgets. Sheetrit also
agreed to give funds to the National Union, Shinui and
National Religious Party, paying what little remained of this
reserve.
Now the treasury has decided, in an unprecedented step in
recent years, to use the reserve earmarked for price
increases to finance some of the supplements to the defense
and local authorities budgets. The price increase reserve is
intended to finance any unexpected increases in the cost of
wages, services and products purchased by the ministries
during the year.
Using the reserve will reduce the flat cut in the ministries'
budgets. On the other hand, if wages and prices rise during
the year, the ministries would not be able to handle it.
Sheetrit estimated the budget supplements in the first third
of the year will total more than NIS 3 billion. The NIS 1.6
billion addition for defense has already been decided on. The
amount of the local authorities supplement is not clear yet,
but it will probably exceed NIS 1.2 billion.
Sheetrit says that if the security and economic situations
continue to improve, tax collection in 2004 will exceed the
treasury's initial estimates. Sheetrit says tax collection in
2003 was low because it reflected the difficult economic
conditions of 2002. Tax collection in 2004 will reflect the
improvement in 2003. Thus, for example, the growth in the
last quarter of last year was 3.7 percent.
Sheetrit said if the tax collection surplus is high enough,
taxes will have to be reduced and the promise to the public
to lower value added tax (VAT) from 18 percent back to 17
percent must be kept.
