The government will need to raise or find taxes worth NIS 4.5-5 billion otherwise the budget deficit will exceed the 3.5% of GDP target. This assessment is taken from an internal presentation by the Bank of Israel prepared by one of its senior economists Dr. Adi Brander, an expert in government accounting.
Brander has updated his calculations and figures after the Knesset recently approved the fiscal package that is supposed to yield an extra NIS 14.5-15 billion annually through, among other things, a 1% hike in VAT, and a rise in income tax for those earning above NIS 14,000 per month. But Brander, like other senior figures at the Bank of Israel and the Ministry of Finance, thinks that it is not possible to rely on two other sources of revenue included in the latest government package: revenues from trapped profits from international companies that took advantage of Israeli government incentive programs and tax breaks within the old Law for the Encouragement of Investment Capital, and plans for stricter tax collection.
These two plans are supposed to yield NIS 4.5-5 billion but additional tax revenues will be required for a similar sum on a permanent basis otherwise the government won't meet its 2013 deficit target. This target is anyway higher than that sought by Governor of the Bank of Israel Stanley Fischer and Minister of Finance budget director Gal Hershkovitz who both wanted a 2.5% budget deficit rather than 3.5%. The Bank of Israel believes that without raising taxes permanently, the government will not be able to meet its budget deficit target before 2018.
The two government plans were split in the original fiscal budget and is not even clear if the second part regarding the trapped taxes will ever be approved. In any event any trapped taxes revenue that is received will only be one-off and not permanent.
Furthermore, the government has made the problematic assumption that it will earn revenues from an economy growing at 3.25% annually. Most experts predict growth of under 3% meaning that there will be an even greater revenue shortfall.
Published by Globes [online], Israel business news - www.globes-online.com - on August 26, 2012
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