"The budget was good when we passed it at the end of last May," Minister of Finance Bezalel Smotrich said at the opening of the budget debate, when he called on the Knesset to approve the revised budget for 2024, following the outbreak of war. In fact, however, the professionals at the Ministry of Finance are taking a ride on the war. The ministry’s Budgets Division has actually dug a NIS 74 billion hole for us in the past two years, and is now trying to brush its responsibility under the carpet. The decline in state revenues was staring us in the face before the war. The Budgets Division didn’t anticipate the hole, even though that is the job of the people there.
In the forecast for 2023, they predicted that revenues would remain at exactly the same level as in 2022, NIS 437.5 billion, an unrealistic assumption. How did they arrive at this number? They apparently fell in love with the fact that in the two previous years (2021-2022) actual revenues were substantially higher than forecast (by 5.8% and 17.4%), and decided to abandon their customary conservatism. Similarly, their revenues forecast for 2024 was NIS 466.5 billion, 6.7% more than in 2023 and 25.3% more than forecast for 2022.
A glance at the long-term trend in state tax revenues since 2009 is enough to make one realize that these were untenable forecasts. Revenues in 2021 and 2022 were very exceptionally high. According to the Ministry of Finance State Revenues Administration report for 2021, growth in revenues that year was 5.4 times the multi-year average. Any beginner economist knows about regression towards the mean - if there’s an extreme result in a series, the following results will probably turn back towards the average.
Surprisingly, the Ministry of Finance professionals, of all people, missed the big picture. They have now remembered it, in a document issued in advance of the Knesset debates on the revised budget for this year. "The decline in revenues in 2023 was partly predictable, as a reversion to the multi-year trend line in tax revenues," they write.
State revenues were just NIS 412.2 billion last year, NIS 25.1 billion below the original Ministry of Finance forecast. Ministry officials claimed in the revised budget proposal for 2024 that "a substantial portion" of the decline in revenues "can be attributed the effects of the war." That is not accurate, to say the least. In fact, at most, 36% of the decline can be attributed to the war, and even then only if other macro-economic factors are ignored.
It must be stated clearly: state revenues would have declined in 2023 in any event, regardless of the identity of the government, and even if the judicial overhaul and the war had never come about. The rapid rise in interest rates led to a sharp slowdown in real estate activity and to a 45% drop in tax revenues from that sector (about NIS 11 billion). The rise in interest rates also caused an appreciable slowdown in the high-tech sector, and to a decline of billions of shekels in tax collection from that sector too.
Budgets Division less optimistic
Furthermore, two other factors were completely forgotten in the Ministry of Finance’s reporting. The first is shipping line ZIM. The Israeli company posted a profit of $4.63 billion in 2022 (and a similar profit the previous year), thanks to the crisis in the global supply chain. As a result, ZIM paid NIS 5 billion in tax in 2022 (and NIS 3.6 billion the previous year). In 2023, ZIM made a loss, and the state even paid it some NIS 500 million in tax rebates in the first nine months of the year.
Then there was ICL (Israel Chemicals), which paid over $1 billion (NIS 4.3 billion) in tax in 2022, because of a combination of unusually good results and a settlement with the Israel Tax Authority. In 2023, its profit fell 70%. The net result is that in 2023 the state was down NIS 5.5 billion in revenues from ZIM and over NIS 3 billion down in revenues from ICL. Yet for the first half of the year, the people at the Ministry of Finance refused to acknowledge their error. They continued to insist that the downturn in revenues was temporary, and that things would improve in the second half of the year - hopes that of course were confounded.
The Ministry of Finance’s current forecast for 2024 tax revenues is NIS 417.4 billion, NIS 49 billion lower than last year’s forecast (NIS 466.5 billion). Is the forecast now more reasonable? Perhaps. It is now close to the multi-year trend line. But if there is a lesson to be learned from the euphoria that overtook the ministry, it’s that it we should take a conservative stance, and remember that forecasts are only forecasts, certainly while the Budgets Division is populated by such optimists.
Published by Globes, Israel business news - en.globes.co.il - on February 13, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.