Expect tax hikes

Meitav chief economist Ron Eichel says the government must tackle the growing budget deficit.

Over the past week, the headlines have informed us that state revenues are lower than required. The result is that the government deficit (the difference between expenditure and income) is too high. The practical significance of this headline means "get set for tax hikes."

To put this into figures, in April the deficit amounted to NIS 2.6 billion and between January and April 2012 the deficit amounted to NIS 3.4 billion, up from just NIS 350 million in the corresponding period of 2011. The deterioration is clear. Since the government sets an annual deficit target (and not monthly), it would be more interesting to compare the deficit over the past 12 months with the annual target. In 2011, the deficit stood at NIS 28.6 billion compared with the target of NIS 25.2 billion - exceeding the target but by an acceptable amount. But in the past 12 months (until April) the deficit has widened to NIS 32 billion.

At the end of 2010, the Knesset voted for a biannual budget and decided on an ambitious budget deficit target of NIS 18.4 billion for 2012. And this is where the problem is - a gap of NIS 14 billion between what is desired and reality.

It might have been possible to get closer to the target if economic growth had remained a lot higher (5%). The problem is that growth in Israel, and no less important around the world, is far from that. If this is not enough, the social protests have harmed state revenues in two ways. Firstly, Israelis have reduced their purchases and since the protests and until today the shortfall has not been made up (causing a fall in VAT revenue). The second is that ministers, MKs, and even the prime minister have acted to hit state revenues.

The political tendency to see the business sector as the enemy has strengthened recently. Even if hostile attitudes to the business sector are partly justified, and there are severe injustices in the economy, the result is that it hit companies' incomes, and the bottom line is the taxes that they pay. The prime minister has contributed to the fall in state revenues when he lowered the excise on gasoline. The Bank of Israel has also added to the "national effort" through its (justified) measure to dampen the housing market, which has brought about stagnation in the real estate sector and reduced state revenues from land taxes by 30%.

The price of uncertainty

It is clear that the government will not succeed in meeting its deficit target for 2012. But that is only the start of the problem. It is also clear that with the present coalition structure, the government won't manage to meet its deficit target in 2013 either - of NIS 9 billion - and that's without taking into account the cost of the Trajtenberg Committee (about NIS 6 billion annually).

There is no one clear reason why we are going to the ballot box in September. But it is clear the election atmosphere among the coalition members has created a situation in which it is not possible to build a 2013 budget with ambitious targets either at the deficit level or the level of priorities that the public wants. The simple solution of every prime minister who does not manage to reduce government expenditure is to raise the deficit. The alternative is to raise taxes. Clearly Netanyahu is going to choose the simple solution - we must assume that he will not go to the people with economic cuts. The only conclusion can be that we will go to the elections before the cuts.

From Netanyahu's point of view, at the moment, the price of political uncertainty resulting from holding elections is not very large. According to the latest polls, the likelihood that President Shimon Peres will call on Netanyahu to form the next government is very high and the opposition is in disarray and divided. Moreover, the new coalition will be in a worst case scenario (from Netanyahu's point of view) similar to the present one. If Kadima or Lapid joins the coalition, it will be easier for the government to change the budget structure since the social ideological gaps between Netanyahu and Lapid and Mofaz are negligible. In other words, Netanyahu has nothing to lose.

Thus it seems that in all probability the new coalition will succeed in passing the required amendments to the budget (taxes and reducing expenditure) for 2012 but first and foremost for 2013 and 2014.

From our point of view nothing could be better than this. At the end of the day it is Israel's citizens who must plug the breach in the government budget. The more it is reduced the less we will need to put our hands in our pockets (and anybody who doubts this should look at Europe and especially our neighbors in Greece).

Fortunately, bringing the elections forward reduces the likelihood of a budget deficit and could even reduce the required tax burden. Elections are good for the public, as we have said.

The writer is chief economist and strategist at Meitav Investment House Ltd..

Published by Globes, Israel business news - www.globes-online.com - on May 7, 2012

© Copyright of Globes Publisher Itonut (1983) Ltd. 2012

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