Finance Ministry cuts economic growth forecasts as tax revenue and investments cool

Treasury revises 2023 growth forecast down to 2.7% from 3% as economic slowdown will lower tax revenue this year by NIS 5.3b; sees judicial uncertainty affecting foreign investment

Sharon Wrobel is a tech reporter for The Times of Israel.

An illustrative photo of the Tel Aviv financial business district skyline. (Elijah Lovkoff via iStock by Getty Images)
An illustrative photo of the Tel Aviv financial business district skyline. (Elijah Lovkoff via iStock by Getty Images)

Israel’s Finance Ministry on Tuesday trimmed its economic growth forecast for this year and 2024 and lowered its projections for state revenues amid a downturn in the global economy and growing uncertainty over the planned judicial overhaul.

After strong growth of 6.5% in 2022 as Israel emerged strongly from the COVID-19 crisis, the ministry now forecasts 2.7% growth in 2023 and 3.1% in 2024 – down from its January estimates of 3% and 3.2%, respectively. Data released by the Central Bureau of Statistics on Tuesday showed that economic growth slowed to an annualized 2.5% in the first three months of the year from 5.3% in the last quarter of 2022.

The Finance Ministry updated its macroeconomic forecasts as the government is pushing ahead to pass the proposed two-year, 2023-2024 state budget, before its May 29 deadline, or risk triggering an automatic dissolution of parliament and snap elections.

Among the reasons for the update, the ministry cited a slowdown in tax revenue and a deep drop in investments in the local high-tech sector in the first quarter of this year, which it said is partly due to global economic trends and a high interest rate environment and partly due to the market uncertainty surrounding the proposed judicial overhaul.

The Finance Ministry’s chief economist Shira Greenberg noted that the revised forecasts do take into account the ripple effect on the economy and investment caused by the uncertainty and tension surrounding the proposed judicial overhaul, which has been put on hold for now following months-long protests and political pressure. Greenberg cautioned that the increase in Israel’s country risk premium in recent months was affecting the attractiveness of investments into the economy.

“The more the legal reform is perceived by the market as harmful to the strength of the independence of state institutions, in particular to the judicial system and in the checks and balances between the authorities, and increases the uncertainty, this is expected to significantly harm growth and economic activity in the economy, and in particular foreign investments,” Greenberg wrote in the macroeconomic update.

Shira Greenberg, chief economist of the Finance Ministry, attends a press conference at the ministry offices in Jerusalem, September 23, 2019 (Flash90)

In the first quarter of this year, Israeli tech companies raised $1.7 billion in capital, down 70% from the $5.8 billion in the first three months of 2022, according to a report by IVC Research Center and LeumiTech. The quarter marked the lowest figure in four years. That is after private investments in the local high-tech sector peaked in 2021 with investments of a staggering $26 billion, slumping to around $15 billion in 2022.

The tech industry, touted as the main growth engine of the economy, generates about 18% of GDP and is responsible for over 50% of exports and about 30% of payroll taxes. In addition, Israel’s high-tech sector employs about 11% of the country’s workforce.

Credit ratings agency Standard & Poor’s sees Israeli economic growth slowing to 1.5% in 2023 citing the current political uncertainty and weaker economic performance in Israel’s key trading partners in Europe and the US. Last week, the International Monetary Fund cut Israel’s growth outlook for 2023 to 2.5% from 2.9%, warning that prolonged uncertainty over Israel’s judicial overhaul represents a “notable downside risk” to the country’s economy. The global economy is forecast to grow at 2.8% in 2023, according to the IMF.

The Finance Ministry also revised its fiscal projections. The ministry now expects Israel to collect NIS 463.6 billion ($127 billion) in government revenue (mainly from taxes and other income) in 2023, which is NIS 5.3 billion ($1.5 billion) less than in its previous forecast in January. For 2024, the ministry projects revenue of NIS 487.2 billion ($133 billion), which is NIS 10.9 billion ($3 billion) below the January forecast.

Greenberg stressed that most of the risks to the forecast are on the downside and the probability that they will materialize have increased in recent months, calling on the government to maintain fiscal restraint that will allow dealing with future changes in the growth and state revenue forecasts.

For this year, the government targets budget deficit targets of just below 1% of gross domestic product and 0.8% in 2024. That is after the government in 2022 posted the first budget surplus in 35 years of 0.6% of GDP, following deficits of 4.4% in 2021 and 11.3% in 2020.

Local economists have already warned that Israel is bound to miss its 2023 deficit target as tax revenue is expected to continue declining with economic activity cooling and as the government is poised to spend NIS 13.7 billion ($3.7 billion) on coalition funds to meet the demands of its political partners. Both Bank Hapoalim and Meitav forecast that the budget deficit could reach 3% of GDP in 2023, triple the size of the government’s target.

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