Israel should issue ‘Munis’ now

 As ran in Israel National News Arutz Sheva.

 

A country’s government’s revenue stream can come from a variety of sources other than taxation. Here is why "Munis" are a good option.

 

The cost of Israel's current multi-front war has been estimated to be reaching tens of billions of dollars. The Israeli Finance Ministry reported that in 2024 Israel spent about $46 billion (8.4% of GDP) in total defense spending. The average of “conflict countries” is 4.4% of GDP.

The ongoing war has obviously put tremendous strain on Israel’s budget and economy, resulting in increased defense spending, projected to continue rising over the next decade. Where will the income needed to close the debt gap come from?

Taxation is obviously the primary source of a government’s income. However, if the tax rates are too high it can be an onerous burden on the population, hurt economic growth and even lead to yeridah (Israelis leaving Israel).

However, seemingly to contradict this current war’s dire long-term economic outlook, the Israeli stock market and certain economic activities are growing or moving forward despite the war. For example, Leviathan, an Israeli energy company, just signed a multi-year $35 billion natural gas supply deal with Egypt.

Fees. A country’s government’s revenue stream can be from a variety of sources other than taxation. Some of these include fees and miscellaneous charges (for services like issuing licenses), profits from government-owned operations (like public corporations or nationalized/monopolies, such as utilities, transportation, and lotteries), fines and penalties, and tourism (fees from entry visas, airport and hospitality taxes), to name a few.

Foreign Aid. Israel is also beneficiary of Foreign Aid from the United States for miliary equipment, which has dramatically increased since the October 7 war began. But unfortunately, Israel has also had to purchase additional material that fall out of the Foreign Aid guidelines, which adds to the overall debt.

Loans. Another source of money for a government is borrowing. Countries borrow money primarily by issuing government bonds. They can also borrow directly from their own central banks and international organizations like the World Bank.

Government Bonds. An investor loans money to the government in return for a promise to pay back the amount borrowed on a specific date or dates along with regular interest payments. The interest rates on government bonds tend to be lower than commercial interest rates because government bonds are considered very low risk. Even so, Israel’s bond interest rates are currently in the 4.2-4.4% range for a 10-year bond. It also must be mentioned that the Interest payments are considered taxable income to the borrower. Israel Bonds, a major fundraising vehicle, raised just below $3 billion dollars in 2023, considered a “record breaking year.”

Within the government bond arena, there is something called a ‘Muni’ or Municipal Bond. They are significantly different from corporate, or even the famous Israel Bonds, in three important ways.

1. Project Based. Unlike the current Israel Bonds, where the funds go into a general account, Munis are issued for a specific public project (local or national) such as schools, highways, water systems, or hospitals. Therefore, attracting foreign investors that want to support a particular area of the country or type of project.
2. Tax Benefits. Municipal bonds can offer interest income that is exempt from government taxes, making them attractive for investors in higher tax brackets. Think of the many Israeli ‘Start Up Nation’ multi-millionaires who could benefit by investing at home. Not to mention the foreign investors that want to support a particular area of the country or type of project.
3. Cost the Government Less. Because of the aforementioned benefits, the interest rates (cost of the loan) can be about one percentage point less. (For every 1 billion dollars borrowed, that is a savings of 10 million dollars that the government would need to repay later on.)

In 2020, Scientific Research Publishing, one of the largest Open Access journal publishers, posted a research paper entitled “Municipal Bonds for Improving Operational Efficiency” from a major Israeli university concluding the immense benefit such a financial instrument would have. A 1998 paper entitled “Municipal Bond Financing: Lessons for Israel” is also an important read.

Munis are a less expensive way for the Israeli government raise money to fund needed government projects with benefits for the lenders and general population. What are we waiting for?

 

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David S. Levine, MBA. is author of “How to Run the Business of YOU” and “Revolutions: In Their Own Words - What They Really Say About Their Causes.” David is a former New York City marketing and business executive, and a retired Rutgers University instructor.