Treasury divided on 2013 growth forecast

Budget director Gal Hershkowitz wants a GDP growth forecast of 2.5-3%, while director general Doron Cohen predicts 3.3%.

Sources inform ''Globes'' that the Ministry of Finance is divided over the growth forecast and tax revenues projection for the 2013 budget. Minister of Finance Yuval Steinitz did not settle the dispute at a meeting yesterday.

Budget Director Gal Hershkowitz and department officials want a conservative GDP growth forecast of 2.5-3%. He is supported by Ministry of Finance chief economist Dr. Michael Sarel, whose growth forecast is 2.7%, and by Accountant General Michal Abadi-Boiangiu, who believes that 3% GDP growth is too high, and that it should be lower. At the ministry she was called "hysterical" and "too conservative" when, in early 2012, she warned of a severe tax revenues shortfall. She was right.

The revenues shortfall forced the government to raise taxes and double the deficit target, which threatened to exceed 4% of GDP (instead of the 2% target).

They are opposed by Ministry of Finance director general Doron Cohen, who wants a growth target of 3.3%, well above the other projections.

Israel's leading financial institutions predict GDP growth of 2.5-2.8% in 2013, which means that the Budget Department's 3% forecast is quite optimistic, and, furthermore, does not reflect the global economic crisis.

Bank Hapoalim (TASE: POLI) and Psagot Investment House Ltd., Israel's biggest bank and investment house, respectively, have both cut their 2013 growth forecasts to 2.5%. The Bank of Israel will cut its current 3.4% growth forecast within a month.

Although the difference between the growth forecasts may seem insubstantial, they amount to NIS 3 billion, but they are the basis for tax revenues projections and the deficit forecast. During a slowdown, which is now occurring, companies tax revenues fall in line with falling profits, and layoffs reduce both income tax revenues and increase spending on unemployment benefits.

A substantial deviation in the growth forecast, and therefore tax revenues, has far-reaching fiscal consequences. This is seen in the Ministry of Finance's forecasts in its biennial budget for 2011-12, which was written in October 2010. The forecasts sharply diverged from reality, due to a lack of understanding and inability to predict economic developments.

Under the biennial budget, tax revenues were projected to exceed NIS 232 billion in 2012. In January 2012, the Ministry of Finance had to cut its projection by NIS 11 billion to NIS 221 billion, and the revised forecast in August further reduced to total to NIS 217-218 billion. The NIS 14-15 billion shortfall from the original estimate amounts to 1.5% of GDP, and is why the government was forced to pass the austerity measures, including tax hikes to make up the shortfall. The Knesset passed the fiscal package last week.

Repeating the 2010 mistake will have dire consequences

The conservative Ministry of Finance officials are worried that exaggerated forecasts for 2013 will repeat the mistake made in 2010. As a result, the deficit in 2013 will again exceed the target, due to a tax revenues shortfall, and it will be necessary to revise the deficit target and raise taxes, but that this time, such measures would involve a credit downgrade for Israel, which could push the country into a financial crisis.

Furthermore, these officials hold that the public expects the Ministry of Finance to behave responsibly and take wide safety margins, not only as a lesson from the wrong calls on 2012, but most all, because of the current economic uncertainty.

The expansive officials believe that their estimates means that the government will not be forced to make another tax hike or institute more budget cuts to meet the deficit target, beyond the NIS 15 billion already needed to meeting the spending cap.

Published by Globes [online], Israel business news - - on August 15, 2012

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

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