Planned austerity measures not enough

Adrian Filut

Cancelling exemptions on advanced training funds, VAT on fruits and vegetables, Eilat, and the betterment tax - can generate NIS 6 billion more.

One thing is absolutely clear: when all is said and done, there will be no choice but to find more revenue sources to the ones already revealed. Ministry of Finance Budget Director Gal Hershkowitz is pushing in this direction, on the assumption that the state budget deficit is permanent, and sharp tax hikes are necessary, in addition to the trapped profits (which are a one-time revenue source, anyway), and stricter tax collection.

The strategy is clear. First, the Budget Department will press the government to go to war and try to cancel the current exemptions, which amount to NIS 40 billion. Cancelling four key exemptions - on advanced training funds, VAT on fruits and vegetables, Eilat, and the betterment tax - can generate NIS 6 billion.

The cancellation of exemptions will force the government to fight bitter battles at great effort, even as it must keep reserves to pass NIS 14 billion in budget cuts. That is why there will be no choice but to raise direct taxes: individual income taxes (which will generate NIS 3 billion); or the companies tax (which will generate NIS 750 million); or another percentage point on the surtax on the rich (which will generate NIS 200 million); or the creation of another tax bracket for very high income earners.

The real problem

Opinion at the Ministry of Finance is not uniform. Minister of Finance Yuval Steinitz adviser Avi Simhon and Deputy Minister of Finance Yitzhak Cohen believe that no sharp direct tax hikes should be enacted.

Governor of the Bank of Israel Prof. Stanley Fischer today broke his long silence to again stand beside the Budget Department. Besides supporting Prime Minister Benjamin Netanyahu and Steinitz, whom he called "responsible", he had another explicit message: this is progress, but not enough. More is needed. Fischer's message is honed even further in view of the conduct and characteristics of the message's recipients, and is linked to a package deal - "I hope that within no more than a few days, we'll see a package that will really change the Israeli economic situation."

In other words, Fischer is calling on the government not to capitulate or surrender to pressure.

Yesterday's package should generate NIS 3 billion in tax revenues in 2012 and NIS 11 billion in 2013. This year's addition should slightly lower the excess government deficit, which would have reached 4% of GDP without the package, to an estimated 3.5-3.6% of GDP.

The real problem begins in 2013, when it will be necessary to make NIS 28 billion in adjustments: NIS 15 billion on the spending side (budget cuts), which will fall to NIS 14 billion on the basis of the cuts in the 2012 budget, and which it is hard to see where they will come from; and NIS 13 billion on the revenues side. This is necessary to achieve the new budget deficit target of 3% of GDP (NIS 30 billion), which the Knesset Finance Committee approved last week.

But while the current package solves 85% of the tax problem, there is still a need for NIS 2 billion, assuming that legislation for stricter tax collection is passed, which will generate NIS 2 billion, and that the trapped profits will generate NIS 3 billion. Otherwise, there is still a NIS 7 billion hole.

The question is where will the money to fill this hole (of NIS 2-7 billion) come from? The answer depends on several developments in the coming months. First, how much revenues will the trapped profits really generate. Second, will the legislation on the stricter tax collection be passed. Third, and just as important, is what will happen to the global economy, and therefore to the Israeli economy, in 2013. All forecasts for 2013 assume that Israel's GDP growth will rise to 3.5%, a pretty high rate given the latest developments in the global and domestic economy.

Published by Globes [online], Israel business news - - on July 26, 2012

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

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