Governor of the Bank of Israel Amir Yaron, who attended today's cabinet meeting to discuss plans for dealing with the excess fiscal deficit, told ministers that the next government would be compelled to raise taxes. The government approved adjustments to the state budget, which consist of an across-the-board spending cut of NIS 1.234 billion in favor of the financing of a defense project, subsidies for afternoon child care in the next school year, and funds for dealing with the consequences of the fire that all but destroyed the settlement of Mevo Modi'im. The cut grew by NIS 84 million at the last minute in order to finance compensation for those affected by the blaze. The cut will affect all government ministries.
Yaron described the Ministry of Finance's forecasts for the next three years as "very generous", and warned that postponement of the budget cut and of tax hikes would send a negative message to the financial markets.
"The picture that has been presented is a worrying one," Yaron said at the start of his remarks. "The budget for this year and in the next three years is characterized by higher expense commitments than current government revenues, what is known as a 'structural deficit', which has manifest itself this year in an actual deficit of 3.5-4% of GDP, and under the definitions of the numerator law it will remain at this level in the next three years.
"This is a very high deficit level by international comparison, even when Israel's high rate of population growth is taken into account," Yaron said. Without corrective measures, Yaron sees a deficit of over 4.5% of GDP.
"The steps presented by the Ministry of Finance, particularly the across-the-board spending cut and the rise in taxes on hybrid vehicles and on solvents, are important, if modest in relation to the size of the problem," Yaron added. "Although it is clear that the main challenge will be for the next government, it's good that the transitional government is acting this way, with the tools available to it, in order to moderate the deficit. It's important that these measures should be approved and implemented, in order to signal to the markets that the policy makers are starting to grapple with the swollen deficit."
Yaron added, "The next government will have to show determination and raise taxes," explaining that the deficit expected in 2020 will be so large that measures such as cutting expenditure and cancelling tax exemptions will not be enough to cover it or reduce it to tolerable dimensions.
Yaron pointed out that the Ministry of Finance's forecasts assume that important social programs and the Buyer Fixed Price housing program, costing NIS 6 billion annually, will be halted; that the across-the-board cut decided on for 2021 will be fully implemented; and that the defense budget will remain almost unchanged in nominal terms in 2021. That being so, the realistic assumption is that without corrective measures the fiscal deficit will be over 4.5% of GDP, and then only on the optimistic assumption that over the entire period GDP grows at its full potential, unemployment remains at its historically low level, and that Israel does not have to deal with significant security events. Otherwise, growth in government revenues will be lower than predicted in the Ministry of Finance forecast, and the deficit will soar as a proportion of GDP.
Published by Globes, Israel business news - en.globes.co.il - on June 24, 2019
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