Analysts insist Treasury manipulated 2018 budget

Moshe Kahlon Photo: Reuters

The main concern is that Israel's Ministry of Finance in effect transferred part of the deficit from 2018 to 2019.

Despite repeated denials by the minister of finance and senior ministry figures, analysts are still asserting that the Ministry of Finance took irregular measures to manipulate the 2018 state budget in order to prevent the budget deficit from exceeding the target.

According to Psagot Investment House Ltd. chief economist Ori Greenfeld, an analysis of the figures on budget performance shows that the Ministry of Finance "stopped spending money" in November and December, while a dramatic rise occurred in tax revenues and deposits by the National Insurance Institute (NII). The main concern is that the Ministry of Finance in effect transferred part of the deficit from 2018 to 2019. Leader Capital Markets Ltd. (TASE:LDRC) economist Yonatan Katz estimated that the budget in 2019 will increase by 0.3% to nearly 4% as a result of the measures taken by the Ministry of Finance.

Psagot's analysis "clearly shows" that the Ministry of Finance "simply stopped spending money" in the last two months of the year. For example, Psagot writes, spending by the civilian government ministries grew 7.5% in January-October 2018, compared with the corresponding period in 2017, but decreased by 1.8% in November-December. Spending by the Ministry of Defense grew 6.3% in the first 10 months of 2018, but fell 4.9% in November-December, compared with the corresponding period in 2017. Psagot says that even after the spending cut in the last two months of 2018, government spending deviated from the original 2018 budget. Spending by civilian government ministries was up 6.2%, compared with a planned 5.3%. Defense spending grew 3.5%, compared with a planned 0.5%.

Psagot cites a dramatic 21% rise in government revenues from corporate taxes in December 2018, compared with December 2017, while the average increase in revenue in 2018 was 4%. In 2017, the Ministry of Finance took action to increase the deficit, which was lower than the target, due to one-time revenues from dividends. This may also have postponed tax revenues until 2018. Such actions also contributed to the 21% increase in December 2018 tax revenues from corporate taxes, compared with December 2017.

Psagot's analysis also cites an unexplained increase in two other revenue sources that also greatly contributed to reducing the deficit. The first is deposits by NII, which totaled NIS 3 billion, compared with only NIS 500 million in the budget. The second is revenues from miscellaneous sources, which totaled NIS 2.3 billion in December 2018, compared with NIS 340 million in January-October 2018.

The need to reduce the deficit arose because of a slower rise in state tax revenues and an increase in spending beyond what was planned. In October and November 2018, the current deficits (going back 12 months), were around 3.4%. Internal Ministry of Finance estimates predicted a 3.1-3.2% deficit in 2018 as a whole. Minister of Finance Moshe Kahlon denied any manipulation of the budget deficit figures. In a speech last week announcing that the 2018 budget deficit had met the target, Kahlon said, "Now they'll tell you that we played with the numbers. Don't let them fool you. There's no such thing as playing with the numbers. All of these numbers are supervised by international companies. Numbers can be manipulated in school, but in economic life and when you're about to issue debt or raise money, you're not dealing with little kids. All of the numbers are supervised by Moody's, the International Monetary Fund, and S&P. Our press can say, 'They manipulated the numbers,' but it's not true."

According to Psagot, there will be "strong demand, wage pressures, a shekel devaluation, and higher infrastructure prices (water, electricity, municipal property tax)" in 2019, "which constitute an environment that supports inflation." Psagot says that the government will be unable to continue cutting taxes in 2019. "In view of the emerging budget picture for the coming year (we estimate a budget deficit of 3.6% of GDP, with a risk of a higher deficit), it appears that there will be no avoiding adjustments of revenues and spending after the elections. In other words, it is not unlikely that we will see an increase in VAT during the second half of the year, which will increase potential inflation by 0.2-0.3% past the annual inflation forecast. Most forecasters have not yet taking this increase into account."

Published by Globes, Israel business news - en.globes.co.il - on January 21, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Moshe Kahlon Photo: Reuters
Moshe Kahlon Photo: Reuters
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