Israel will have to increase taxes, central bank warns

10 Jun 13
Israel is overspending so much it will need more tax rises to meet its deficit targets for 2015 and 2016, the country’s central bank warned yesterday.

In its analysis of the two-year draft budget for 2013 and 2014, the Bank of Israel said the government would have to raise an extra NIS11bn (£1.95bn) in tax even if the country reduced its spending in line with the ceiling set in Israeli law.

In a statement issued before the Israeli Parliament, the Knesset, meets on Tuesday to approve the budget plan, the Bank of Israel said: ‘The government’s expenditure commitments for 2015 and onward are already greater, by several NIS billions, than the ceiling set by law.

‘If growth will not be especially rapid, then even if the government reduces its expenditure commitments to be in line with the ceiling, there will be a need to raise tax revenues further in order to meet deficit targets in 2015 and 2016,’ it explained.

The two-year budget, which was passed by Israel’s Cabinet last month, sets a deficit ceiling for 2013 of 4.65% of gross domestic product. The government is planning tax increases worth NIS15bn (£2.66bn) and spending cuts of NIS18bn (£3.2bn) to bring the deficit down to 3% of GDP next year, and then further down to 2% of GDP by 2016.

But the Bank’s analysis warned that without further tax increases in 2015 and 2016, the deficit would remain at around 3% of GDP until 2018. This would be greater still if it pressed ahead with its spending plans, a scenario under which the deficit would stabilise around 3.5%–4% of GDP, it noted.

 Tax increases and spending cuts planned for this year and next are ‘necessary’, the Bank said. It claimed that, without them, Israel’s deficit would have increased above 6% in the next few years and its debt-to-GDP ratio would near 100% by the end of the decade.

But it warned that more needed to be done to address underlying problems in the country’s spending habits.

‘A major factor contributing to the size of the fiscal problem with which the government has to deal now, and which threatens meeting the expenditure rule in 2015–16, is the lack of monitoring of the gap between the cost of programmes approved by the government in recent years and the expenditure ceiling set by the fiscal rule,’ it said.

This had been exacerbated by additional plans for spending on areas such as education, infrastructure and health, the statement noted.

The Israeli government should quickly adopt an effective system to monitor spending, it said. ‘A system like that would follow government commitments for coming years and require immediate handling of developing deviations from the expenditure ceiling set in law,’ it explained. ‘It would contribute considerably to the credibility of the government’s commitment to its fiscal goals and reduce the repeated deviations from them.’

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