The Bank of Israel has published its survey of Recent Economic Developments, which includes its periodic fiscal survey and drill-down analyses of several economic topics. The survey indicates that since October 2014, the economy has continued to grow at the rate of the past three years, on average, but there was marked volatility during the period, reflecting shocks such as the recovery from Operation Protective Edge, the effect of changes in taxation on vehicle imports (and its effect on reported output), and fluctuations in exports. Private consumption led the increase in demand in the economy during the period, while exports and investment increased at the end of 2014 but declined in the beginning of 2015. In the labor market, the unemployment rate continued to decline and the participation and employment rates stabilized at elevated levels.

Main points:

• Economic activity continued to grow in recent months at a rate similar to that which prevailed over the past three years, with a rapid rate of growth in private consumption, a virtual standstill in exports, and a decline in investment. The unemployment rate continued to decline, and the labor market participation rate stabilized at an elevated level.

• Through November 2015, the government is operating with an interim budget. Expenditures so far are similar to the path consistent with the statutory expenditure ceiling. The deficit expected in 2015, of 2.5-2.8 percent of GDP, is similar to the statutory deficit ceiling.

• The new government's guidelines include programs with a marked budgetary cost whose sources of funding are not detailed.

• The expected deficit in 2016 - based on expenditure programs approved by the government and those included in its guidelines, and given current tax rates - is around 3.3 percent of GDP, and in 2017–20 it is around 3.5 percent of GDP, significantly above the deficit target.

• The government's planned expenditures, based on approved programs, including those incorporated in its guidelines, are about NIS 10 billion greater than the expenditure ceiling for 2016 and about NIS 14 billion greater than the 2020 ceiling. This assumes that from now until 2020 the government does not decide on a single additional expenditure without offsetting another expense by the same amount.

• In light of the considerable adjustments required to meet the existing fiscal targets, the government should examine if those targets are appropriate for its order of priorities, and if it assesses that will be able to meet them.

• With that, in order to maintain fiscal credibility, it is important that the deficit target that is adopted does not exceed 2.5 percent of GDP, to assure a continued decline, even if moderate, in the debt to GDP ratio.

• In addition, the government has to decide whether to continue to reduce the share of its expenses in GDP in line with the existing expenditure rule, even though this share is low compared with other advanced economies, or to raise the ceiling and increase revenue in parallel, subject to the target of a measured decline in the debt to GDP ratio.

• If expenditures and revenues continue as currently planned, the debt to GDP ratio is expected to rise to over 70 percent by 2020.

• In order to avoid repeated adjustments in expenses, due to gaps between expected and actual inflation, the government should switch to nominal budgeting, based on the midpoint of the inflation target range.

• It is important that the budget fully and transparently present - in line with generally accepted accounting principles - its expenses for dealing with expanding housing supply, including handling the vacating of lands in the central areas of the country. To the extent that one-off expenditures are required for those objectives, it is preferable that they are recorded as an extraordinary addition to budgetary expenditure and the deficit in accordance with generally accepted accounting principles, and not through extra-budgetary items.