"The Ministry of Finance did not have a contingency plan for an outbreak of inflation, and after the Bank of Israel interest rate increased, the banks increased their profits and did not fully roll over the interest rate to citizens' deposits, which are groaning under the economic burden," State Comptroller Mattaniahu Engelman states in a special report on the cost of living conducted before the outbreak of the war.
The comptroller writes that "the Ministry of Finance did not have a contingency plan for necessary fiscal measures during the outbreak of inflation, which in 2022 exceeded the target set by the government (1%-3%) and reached 5.3%."
Another criticism by Engelman relates to the increase in the interest rate paid by the banks on the public's deposits, which was partial and stood at about 60 percent, and thus, he says, the banks increased their profits.
State Comptroller Matanyahu Engelman, Photo: Oren Ben Hakon
The year 2022 was characterized by a high inflation environment relative to previous years, and at the end of 5, the inflation rate in Israel was 3.1 percent, leading to a marked deviation from the inflation target range set by the government, which was defined as 3–<> percent. High inflation, accompanied by uncertainty and greater than usual volatility of price changes, negatively impacts economic activity and growth, as well as the public's purchasing power.
The audit revealed deficiencies in various areas, including: the lack of a contingency plan at the Ministry of Finance for required fiscal measures during an outbreak of inflation, the lack of an updated review by the Chief Economist's Department at the Ministry of Finance to analyze the sensitivity of state revenues, and incomplete information in the Accountant General's Department at the Ministry of Finance regarding state engagements linked to the CPI.
The Ministry of Finance in Jerusalem, photo: Oren Ben Hakon
In an international comparison, fiscal policy measures adopted in the countries surveyed (France, Italy, Britain, Spain, and Germany) are divided into three: first, measures aimed at reducing the prices of certain goods or services—for example, the prices of public transportation in order to make things easier for the population; second, measures aimed at increasing the income of particularly vulnerable populations; Third, measures aimed at increasing state revenues to finance the aforementioned measures.
The Comptroller found that while Israel took only steps to reduce energy and fuel costs, in the other countries surveyed three types of steps were taken as detailed above, and that the main measures published by the Ministry of Finance in January 2023, which focused on reducing energy and fuel costs, were not accompanied by prior consultation with the Chief Economist's Department and the Bank of Israel.
The only steps taken, photo: GettyImages (illustration)
The audit also pointed to the existing exposure of government expenditures to the Consumer Price Index, such that in 31% of government ministries (11 ministries) that manage about 41% of the state budget (about NIS 187 billion), the budget exposed to the CPI is about 51%-80% of the ministry's budget. In addition, more than 50 percent of government debt is linked to the consumer price index.
In the eyes of the citizen, the audit examined the rate of increase in the Bank of Israel interest rate, which is "rolled over" to the public by "rolling" the interest rate on the loans taken by the public and on the deposits held by the public (the "transmission"). The audit revealed that in contrast to the rate of increase in the Bank of Israel interest rate, which was transferred in full by the banks to the interest rate for bank credit provided to the public, the increase in the interest rate paid by the banks on the public's deposits was partial and stood at only about 60 percent, as of August 2022. This partial "transmission" contributed to the significant increase in bank profits.
Bank of Israel, Photo: Oren Ben Hakon
Comptroller Engelman recommends that the Ministry of Finance prepare for a changing inflationary environment, while taking focused steps that will reduce the possibility of an inflationary spiral on the one hand, and support for advanced populations that have been harmed by the increase in inflation on the other. In addition, the Banking Supervision Department at the Bank of Israel must continue to ensure the stability of the banking system, and at the same time act to ensure that as a result of the increase in the interest rate, the banking system will not earn huge profits at the expense of savers.
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