A low budget deficit in January, against the background of a relatively sharp increase in direct tax revenues
The publication of the Ministry of Finance regarding the implementation of the budget shows that the government’s activity in January 2021 amounted to a deficit of NIS 0.1 billion compared to a surplus of NIS 5.9 billion in January 2020. It should be noted that this is a significantly lower deficit March-December 2020). In light of this, the budget deficit in the last 12 months (February 2020-January 2021) increased moderately to 12.1% of GDP (approximately NIS 166.4 billion) compared to 11.7% of GDP in the year 2020.
Government expenditure in January amounted to NIS 36.4 billion. This is an increase of about 25.1% compared to January 2020, but excluding expenditures due to the government assistance program, expenditures decreased by 0.8%. At the same time, tax revenues amounted to about NIS 34 billion, despite the tightest closure of the economy throughout most of January. This is a relatively sharp (real) increase of about 5.6% compared to January 2020, before the outbreak of the corona crisis, which the Ministry of Finance notes as impressive, given the circumstances. This increase is due to a 12.5% increase in direct tax revenues, while indirect tax revenues decreased by 1.6%, due to a reduction in activity in most industries and a decrease in imports during the closure.
Expenditure under the corona economic assistance program amounted to NIS 7.2 billion in January, in parallel with the update of the overall budget expenditure framework of the program (2020-2021 and subsequent years). The updated volume is about NIS 137 billion, of which NIS 84.3 billion has been made (in cash and commitments and commitments) since the beginning of 2020, which is about 61% of the total planning. As can be seen in the attached diagram, the implementation rate of the plan items relating to direct support in households and businesses and health expenditure, which are also the major expenditure items of the plan, is higher than the other items. This is while a particularly low implementation rate characterizes the sections relating to vocational training, the Ministry of Education’s preparations and the crisis exit plan, a development that, if continued, may complicate the process of the economy emerging from the crisis and returning to a path of accelerated growth.
Looking ahead, the current year is also expected to amount to a significant budget deficit (in the range of 8% -11% of GDP). This is due to the continuation of the crisis well into 2021, with high morbidity levels and as a result significant restrictions on activity, even when the process of exit from quarantine began. In light of this, it appears that a return to low deficit volumes (around 3% and GDP and less) is not expected to occur in the coming years.
The Bank of Israel purchased about $ 6.8 billion in January 2021, in order to cope with the strengthening of the shekel
The volume of foreign exchange purchases by the Bank of Israel in January 2021 was approximately $ 6.8 billion. This is approximately 23% of the total volume of purchases planned for 2021, which, according to the Bank of Israel’s announcement of January 14, is approximately $ 30 billion. The purpose of the Bank of Israel’s advance announcement is to deal with the sharp strengthening that has taken place since November 2020 in the shekel and which intensified in the first half of January.
In the first half of January, there was a sharp appreciation of about 3.2% in the nominal effective exchange rate of the shekel against the currency basket, which brought the shekel to its peak against the basket. This, after a appreciation of about 5.1% in the shekel / basket exchange rate in 2020 (when in November-December the shekel strengthened by about 2.8%), despite the negative consequences of the corona crisis on the Israeli economy and even though the Bank of Israel purchased a cumulative amount of About $ 21 billion during the year. It should be noted that in 2019 there was a sharper appreciation of about 8%, and at the same time the Bank of Israel purchased foreign currency in a significantly reduced amount, of about $ 4 billion.
One day after the Bank of Israel announced the volume of purchases planned for 2021, the shekel weakened against the basket by about 3.7%, and by February 8, it had completed a depreciation of about 5.1% compared to its level on the eve of the announcement (see chart). Due to the massive acquisitions in January, the Bank of Israel’s foreign exchange reserves reached a record high of $ 179.5 billion, which is 44.9% of GDP. In this context, we note that in 7.2 the Governor of the Bank of Israel referred to the program of foreign exchange purchases, noting that “$ 30 billion is a very considerable sum. We are committed to spending that amount … of course if it is relevant, and given the economic and market conditions at that point, we can also increase the scope of the foreign exchange purchase program, as we announced at the time about increasing the quantitative easing program in government bonds. ” In doing so, the Governor once again signals the Bank of Israel’s commitment to dealing with the strengthening of the shekel.
As we noted in our review of 20.1.21, since the Bank of Israel is not limited (by law) in the volume of purchases, they are expected to continue as long as necessary to prevent “over-appreciation” of the shekel, which exceeds the appreciation derived from basic factors, and in particular the current account surplus. , Estimated at $ 20 billion (in 2021).
In conclusion, the Bank of Israel continues to implement its plans, updating them frequently, in order to achieve its goals in the area of price stability and financial stability. Beyond the foreign exchange purchase program, the Bank of Israel continues to support government activity by purchasing government bonds. Thus, in January, the Bank of Israel purchased government bonds in the amount of NIS 4.2 billion, and since the beginning of the program, the Bank of Israel has accumulated a total of NIS 50.4 billion in government bonds, and it is expected to continue in the purchase program in the coming months. All this, out of a framework of NIS 85 billion that he announced.
Business trends survey: moderation in the pace of improvement in January and expectations of deterioration in activity in the trade and services industries
The Central Bureau of Statistics (CBS) published the Survey of Business Trends for January 2021. The survey was conducted in the shadow of the third tight closure in which the economy was until recently, and for most of January, which included, among other things, significant restrictions on business sector activity. Mainly on businesses that receive an audience.In light of this, the survey findings indicate a significant moderation in the rate of improvement in the activity of the trade and services industries, which were largely affected by the restrictions.In contrast, in manufacturing and construction, which were hardly affected by these restrictions, the moderate improvement continued in January.
The net balance sheets (the weighted difference between the percentage of company managers who reported an improvement in the situation and the percentage of company managers who reported a deterioration) in the leading indices of most industries moved to the positive range in early 2021, except for the net balance of the construction industry that remained negative (see chart). It should be noted that the recovery in activity is also evident in the data of the Bank of Israel’s Companies Survey for the fourth quarter of 2020, conducted from mid-December 2020 to mid-January 2021, which was published in early February. In this context, it should be noted that the Bank of Israel has announced that it will stop publishing the Companies Survey starting in the current quarter, and from now on it will use the CBS Business Trends Survey, which is conducted monthly and includes a broader sample.
Despite the improvement in activity indices, it should be noted that in some industries the expectations are for a deterioration in activity in February, which reflects a certain decrease in the degree of optimism among the business sector. This, with an emphasis on a significant deterioration in expectations for the volume of sales and orders from suppliers in the retail trade industry, a significant deterioration in expectations for sales volume for exports in the services industry and a certain deterioration in expectations for the volume of activity in the construction industry in February. In conclusion, the slow and gradual exit process of the economy from the third closure has recently begun.
However, against the background of high morbidity data, and although the rate of vaccinators in Israel is high by international standards, most restrictions on activity remain at a relatively high level, so business sector activity is not expected to recover significantly in the near future, with emphasis on trade and services. The more change there is in the direction of a return to wider activity, probably during the second quarter of the year, the more it will support business sector activity.