BoI: More tax hikes needed in 2015

"Government spending commitments for 2015 and later are already billions of shekels greater than the cap set in law."

"Government spending commitments for 2015 and later are already billions of shekels greater that the cap set in law. If growth is not very rapid, even if the government reduces its spending commitments in line with the cap, a further increase in tax revenues will be necessary to meet the deficit targets for 2015 and 2016," states the Bank of Israel in a review published today.

The amendments in the government's cutback plan in the 2013-14 budget and the tax hikes "are expected to raise the tax revenues/GDP ratio in 2014 by more than one percentage point compared with 2013. The amendments are also expected to reduce the public spending/GDP ratio by almost two percentage points, compared with what would have been expected on the basis of the plans adopted by the government. But the government's spending plans for 2013-14 will be so great, so that even if they are sharply scaled back, the public spending/GDP ratio in 2014 will be similar to the ratio in 2012, of 43.5% of GDP."

The Bank of Israel Research Department estimates that on the basis of the current assessments of the macroeconomic situation over the next two years, full implementation of the measures in the plan will allow the government to comply with the spending cap and meet the deficit targets for 2013 and 2014, even though the measures will slow GDP growth in the short term. But since the margin for meeting the targets is narrow, if large parts of the plan are not approved, or if the macroeconomic environment deteriorates further, this will jeopardize meeting the targets.

The fiscal adjustment proposed in the budget, which the government has approved, is expected to reduce GDP growth in 2014 by 0.7 percentage points compared with the estimates made before the plan. Despite this price, the plan to reduce the deficit is essential, because without it, the deficit would reach almost 6% of GDP in 2014, and would grow further in 2015. Such a deficit would rapidly increase the debt/GDP ratio to almost 100% of GDP by the end of the decade.

The Bank of Israel said that to keep the deficit caps for 2015 and 2016, an additional NIS 4 billion in revenues (0.4% of GDP) will be needed in 2015, and NIS 7 billion (0.5% of GDP) in 2016. Such a reduction in the deficit, in accordance with the legally mandated targets, will make it possible to return to a falling debt/GDP ratio. But if the government increases its spending in line with existing plans, which are higher than the spending caps, and if tax rates are not raised, the deficit will stabilize at 3.5-4% of GDP, and the debt/GDP ratio will steadily grow.

The Bank of Israel concludes, that in view of the risk which has emerged regarding the credibility of fiscal policy, and which must be adjusted, it is important for the government to adopt as soon as possible an effective system of spending controls for the coming years in order to prevent a repeat of the process which led to the current problem.

Published by Globes [online], Israel business news - www.globes-online.com - on June 9, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018