Finance Ministry Chief Economist Shira Greenberg on Tuesday revised downward the country's tax revenue forecast, the economy's growth forecast, and raised the inflation forecast for the next two years.
The forecast of state revenues (which includes tax revenues and other revenues) declined by NIS 5.3 billion in the current year and by NIS 11 billion in 2024. "Interest rate increases, uncertainty in the global economy, and uncertainty in the domestic economy, particularly around the legal reform, add to the slowdown in investments and affect the high-tech industry," the report explains.
Greenberg adds: "Most of the risks to the forecast are downward, and the probability of their realization increased in this update, and therefore it is important to maintain fiscal space that will enable dealing with future changes in the growth and revenue forecast."
In addition, Greenberg lowered its forecast for the economy's growth rate. In 2023, growth is expected to moderate by 0.3 percent compared with the previous forecast, to 2.7 percent. The projected growth rate in 2024 is moderating by 0.1 percent compared with the previous forecast, to 3.1 percent.
"The new forecast compiled by the Macro and Forecasts team in the Chief Economist's Department takes into account developments in the global economic environment, National Accounts data for 2022, and additional data published in recent months, including indicators from the capital market. The forecast in the baseline scenario does not take into account the implications of the legal reform to the extent that it is implemented, and constitutes a worsening scenario for the baseline scenario presented. The forecast in the baseline scenario does take into account the ramifications of the uncertainty and tension surrounding the reform as they affect the Israeli economy at this time," Greenberg explained.
According to sources in the Ministry of Finance, "The issue of legal reform still creates uncertainty, and we reflect this in our forecasts. Legal reform is at risk to forecasts. We don't know what will happen to this issue, so we issued a paper with a position with implications. It is important to understand that this is a worsening scenario in terms of risks. If this happens, it is an exacerbation scenario. Both the Bank of Israel and the IMF issued currency scenarios. We see a significant decline in investments of 74% compared to the corresponding quarter of FY22. In high-tech, there is a further decline because of the uncertainty that this is a local risk."
The report by the chief economist said that in recent months there have been a number of changes in both the global environment and the local economy. Inflation rates are moderating at a slower pace than we expected at the beginning of the year. As a result, central banks, including the Bank of Israel, continue to adopt restraining monetary policy, and we now assume that convergence to inflation targets will continue longer and will be accompanied by higher interest rates. Meanwhile, the IMF revised its global growth forecast slightly downward in the April 2023 publication.
"Against the background of this environment, we expect lower growth rates in investments in the economy. The increase in the Israeli economy's risk premium in recent months has also harmed the attractiveness of investments. According to the data currently known to us, investments by venture capital funds are in a steady decline, and now, in the baseline scenario, we expect them to reach pre-COVID-19 levels. The interest rate environment is relatively high and is expected to lead to a negative impact on the real estate sector, and we have witnessed signs of this negative impact in recent months," Greenberg writes.
The updated state revenue forecast for 2023 was revised based on the macro picture and tax revenues received through April 2023, to NIS 463.6 billion, a decline of about NIS 5.3 billion (about 0.3 percent of GDP) below the forecast prepared in January 2023. The forecast for 2024 is NIS 487.2 billion, NIS 10.9 billion (about 0.55 percent of GDP) below the forecast prepared in January 2023.
The inflation forecast was also revised against the background of economic developments in Israel and abroad In the first four months of the year, the inflation forecast of the Chief Economist Department of the Ministry of Finance for 2023 was raised to 3.2 percent (December versus December). During 2024, the inflation rate is expected to be 2.9 percent, in line with the forecast of the Chief Economist's Department, in the upper part of the Bank of Israel's target range.
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