Promoting Digital Transformation
The low interest rate environment in the Israeli economy produces a historic opportunity to raise resources and direct them to investment in growth-enhancing projects, particularly in public infrastructures. We estimate that increasing investment in public capital by 2% of the GDP per year, between 2021 and 2030, would raise the growth rate of the Israeli economy by a percentage point, in comparison to Bank of Israel projections for this period. As a result, the GDP in 2030 would exceed Bank of Israel projections by 6% (NIS 114 billion).
This result stems from the fact that the ratio between the per-capita stock of public capital and GDP in Israel, which stands at around 50%, is significantly lower in comparison to developed countries which share some key attributes with Israel (the benchmark countries), where that ratio is around 75%. Consequently, the marginal product of public capital in Israel is high, and investment in this capital is especially beneficial. The Bank of Israel, which also recommends increasing public investment, does not reflect the high return on this investment in its growth projections, while according to the outline proposed by the Ministry of Finance, the ratio of public investment to GDP should actually be reduced.
Our paper presents a quantitative assessment of the growth scenario and debt burden which are expected to result from increasing investment in public capital, to be financed by increased debt, and compares this result to the growth projections issued by the Ministry of Finance and the Bank of Israel for the years 2021-2030. According to our scenario, real growth in Israel between 2025 and 2030 would be around 4.0%, higher than the 3.2% forecasted in the Ministry of Finance scenario or the 2.6% in the Bank of Israel scenario.
Funding the increase of the stock of public capital between 2022 and 2024 through loans would increase the debt-to-GDP ratio to around 84% in 2026, compared to around 76% as projected by Bank of Israel. Reducing the primary deficit later on, to a target of 1.5% by 2028, and the additional growth which would result from this investment, would decrease the debt-to-GDP ratio by 2030 to around 77%, similar to the ratio projected by Bank of Israel. However, the cumulative difference in interest payments over this period would amount to only NIS 13 billion, whereas the additional GDP would be around NIS 308 billion, 23 times higher than the additional interest payments.