Abstract
The paper provides an overview of the role of the fiscal imbalances and the ensuing public debt in explaining major episodes in Israel’s recent economic developments. The main conclusions from the Israeli budgetary developments may have more general validity: (a) deficits lead to inflation and stopping inflation requires elimination of deficits; (b) a major effect of inflation is a large shift of the tax burden from capital to labor; and (c) shocks to labor supply, such as massive labor inflow through immigration, can be absorbed without worsening government finances, when the labor and the housing markets are sufficiently flexible.
This chapter was written as an IMF Working Paper in April 1996, while Assaf Razin was visiting the Fiscal Affairs Department at the International Monetary Fund. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.
The authors wish to thank Nils Gottfries for useful comments. This chapter was first published in the Swedish Economic Policy Review, Vol. 3, No. 1, Spring 1996, and is reprinted here with the publisher’s permission.
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Razin, A., Sadka, E. (1997). Fiscal Balance During Inflation, Disinflation, and Immigration: Policy Lessons. In: Razin, A., Vosgerau, HJ. (eds) Trade and Tax Policy, Inflation and Exchange Rates. Studies in International Economics and Institutions. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-60846-9_3
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