The 2015 budget deficit is projected to be only 2.5-2.6%, very close to the original target set by legislation, Bank of Israel economists believe. As part of a biannual survey of economic developments in Israel, the Bank of Israel today published its analysis of the fiscal situation before the preparation of the 2015 budget. In the analysis, the Bank of Israel also recommended that Israel raise NIS 8 billion more in taxes and cut expenditure by NIS 10 billion by 2020.
Former Minister of Finance Yair Lapid's budget proposal was aborted by early elections, after having been approved on its first Knesset reading. According to the law, the 2015 budget deficit target was 2.5%, but Lapid's proposal was based on increasing it to 3.4%, against the wishes of Governor of the Bank of Israel Karmit Flug, who said the deficit should not be increased beyond 3%.
Lapid's deviation from the deficit target, which required a legislative amendment, resulted from his 0% VAT initiative, whose estimated cost was NIS 2.5-3 billion, and from a NIS 4.3 billion defense budget increase in addition to the regular supplement. Choosing its words very carefully, the Bank of Israel now says, "It is now less likely that the government will continue to support the 0% VAT bill."
With respect to the defense budget supplement, the Bank of Israel believes it will be offset in practice by limiting the increase in the state budget to the 2.6% determined in the budget spending rule. The Bank of Israel therefore sums up by saying, "The decision to observe the spending ceiling in the law and avoid tax cuts will enable the government to meet the legal budget deficit ceiling, and will reinforce the credibility of its commitment to an ongoing reduction of the deficit and the ratio of debt to GDP."
At the same time, the economists qualified their remarks by citing the lack of clarity concerning other measures planned by the government that would have increased state revenue and cut spending in 2015, such as cutting the transportation budget and bond raising for Israel Railways.
Published by Globes [online], Israel business news - www.globes-online.com - on February 4, 2015
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