Jul.03, 2012 | 5:11 AM–Raising government spending increases the trade deficit, according to a Bank of Israel report released on Monday.

Increased government spending increases imports in the short term, which then leads to lower net exports, meaning exports minus imports, reported Yuval Mazar and Maya Haran of the esearch department. They also said boosting government expenditure does not lead to a similar increase in the public’s savings.

The Bank of Israel said the report does not necessarily reflect the central bank’s official opinion. The report also found connections between reducing government spending and net exports, and between public consumption and net exports.

Haran and Mazar based their research on the Israeli economy between 1995 and 2010. They found that as public consumption fell over that period, exports rose. Israel moved into a positive balance of trade for net exports in 2006, while the state’s share of GDP continued to fall.

Increasing government expenditures does not influence imports indirectly, such as by affecting exchange rates, changing inflation expectations or interest rates. Instead, increased government spending has a direct effect on demand over a two-quarter period…Read More>>

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