"Tax hikes in Israel in 2013 seem unavoidable, including taxes on high incomes, and even a VAT hike, even though an election year is in the offing," says Meitav Investment House Ltd. chief economist Ron Eichal, in his weekly survey.
Eichal says that the government set the 2013 deficit target at 1.5% of GDP, which means a deficit of NIS 14 billion, according to the original budget - NIS 17 billion less than the current deficit that the government is working with.
"Even if we assume higher GDP growth in 2013 than in 2012, which will improve tax revenues, this will still not be enough to cover the shortfall. Therefore, under the current operating environment, meeting the target requires fiscal adjustment - cutting spending, raising taxes, or both," says Eichal.
The budget deficit for the past 12 months is NIS 30.8 billion, 3.4% of GDP. The deficit target for 2012 under the biennial budget was NIS 18.4 billion.
Eichal estimates that the Ministry of Finance will meet the deficit target for 2012, which he estimates at 3.5% of GDP, or slightly higher. The assessment is based on ministry remarks about stabilization with a slight tendency for a rise in direct and indirect taxes.
Nonetheless, Meitav says that in view of next year's elections, the likelihood of greatly reducing government expenditure is quite problematic, which means that the government will probably not be able to solve the deficit blowout.
The Ministry of Finance plans to cut all ministries' salaries budget by 2%, and to make other cuts in salary agreements. Eichal says that this proposal will save only NIS 500 million in government spending. He also does not expect any reductions in defense spending at this time, in view of the geopolitical situation. Moreover, government spending will likely increase in the coming year because of the latest agreement signed with striking unions, such as with the seaports, railways, and doctors.
"Another option, which appears to becoming practical, is to raise the deficit ceiling. This will require Knesset approval, but it is apparently the most realistic option in the current environment, and the easiest for MKs. We can therefore expect the 2013 deficit ceiling to be raised to around 3% of GDP, which will prevent serious shocks to budget management," says Eichal.
Published by Globes [online], Israel business news - www.globes-online.com - on April 9, 2012
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