Isranomics

Israel’s Finance Ministry sees inflation slowing down to 2.7% in 2023

by | Dec 12, 2022 | Economy | 0 comments

According to a report published by the Israeli Finance Ministry, the country’s GDP would increase at an impressive 6.3% this year. However, it anticipates a somewhat lower 3% growth rate for the economy in 2023, compared to the 3.5% forecasted in June. On the positive side, inflation was revised down to 2.7%, which is significantly lower compared to the current level of 5.1%.

The updated estimate takes into account recent developments both locally and internationally, such as interest rate hikes by central banks in an attempt to limit persistently high inflation.

The Bank of Israel increased the interest rate a total of six times in the prior nine months, bringing it up to 3.25%. These steps, according to the Ministry of Finance, will moderate the rise in the cost of living, but at a price: a slower rate of economic growth.

The expected economic downturn occurs at a time when Israel’s employment rate is high. However, the weakening of the economy’s growth will almost definitely have an impact on employment. Therefore, the Ministry of Finance envisions a moderate rise in unemployment in the coming year.

The report also states that despite an annual growth rate of 8.6% in 2021, which was marked by the economy’s recovery from the Corona crisis, a reversal of the trend was already obvious after GDP decreased by 3.4% in the first quarter of 2022. The second quarter experienced 7.3% growth, which was mostly due to robust growth in high-tech service exports and an increase in private expenditure. GDP expanded by a more moderate pace of 2.1% in the third quarter, a slower rate than expected by the market.

In addition, during the year, the state achieved exceptional budget surpluses, owing partly to an unusual spike in tax receipts. However, the positive trend has waned in recent months. Tax revenues declined by 10% in the last month compared to the previous year. At the same time, VAT collection fell by 17% during this time period, owing mostly to a drop in real estate and trading activities.

The Ministry of Finance expresses worry in the report that if the current trend in tax revenue declines continues, it may result in a budget deficit. This is especially concerning given that the coalition’s leaders have already stated their intention to enact a number of high-budget measures, including cutting water, property, and energy tax rates, abolishing levies on sugary beverages, disposable utensils, and increasing public-sector wages.

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