The Ministry of Finance is re-examining the revenue forecast and the deficit target for the 2015-2016 budget, which was only recently passed at first reading by the Knesset. This follows the decision by Minister of Finance Moshe Kahlon and Prime Minister Benjamin Netanyahu to reduce the rate of VAT by 1% from October 1 and the Companies Tax rate by 1.5% from the beginning of 2016. The move will cut NIS 6 billion from state revenues in 2016, with NIS 4.8 billion of the cut stemming from the VAT reduction.
The intention of lowering taxes predictably came in for widespread criticism from senior economists, headed by Governor of the Bank of Israel Dr. Karnit Flug, who dubbed the move "imprudent" and warned of its impact on the fiscal deficit. Other economists, such as former director-general of the Ministry of Finance Prof. Avi Ben Bassat and former Ministry of Finance chief economist Dr. Michael Sharel, have sharply criticized the cut in VAT.
The Ministry of Finance's current revenue forecast for 2016 is NIS 272.3 billion, NIS 5.9 billion higher than the target for 2015, something that in the view of senior ministry officials ensures surplus collection in 2016, unless the forecast is revised. The deficit target that the Ministry of Finance presented for 2015 and 2016 is 2.9% of GDP, but sources inform "Globes" that another estimate was presented to the minister of finance, according to which 2015 will end on a lower deficit of around 2.5% of GDP.
The Bank of Israel on the other hand believes that the actual deficit is higher than the official target, because of accounting maneuvers. In addition, it is necessary to take into account expectations that the defense budget will be expanded beyond the amount approved by the government, after the prime minister himself said that a substantial rise in the defense budget could be expected in the course of the year.
A Ministry of Finance spokesperson said, "Discussions are currently taking place headed by the director-general for the purposes of examining the parameters of the forecast and the deficit target, and the conclusions will later be presented to the government."
Published by Globes [online], Israel business news - www.globes-online.com - on September 7, 2015
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