The Bank of Israel has given the government a rap on the knuckles for the tax cuts announced today, saying any surplus tax receipts should be used to reduce government debt, not to further stimulate private consumption. VAT is to be cut 1% to 17%, and Companies Tax is to be cut 1.5%. Minister of Finance Moshe Kahlon has been justified the cuts by saying that surplus tax receipts amounting to some NIS 10 billion, should be returned to the taxpaying public.
. The Bank of Israel comments on this, "In the past few months, there has been a substantial surplus in the amount of tax collected. It is hard to determine at this stage whether the rise in receipts can be expected to be maintained, or whether it partially stems from one-time factors, such as growth in housing transactions or a rise in tax on stock exchange capital gains.
"In the past few months, there have been signs of a slowdown in economic activity, and in particular a fall in exports and investment. Moreover, the uncertainty over developments in the global economy has grown because of the sharp volatility on world financial markets in recent weeks. It would therefore be imprudent to treat the surplus tax collection that has been recorded in the past few months as an ongoing development, and to base upon it an upward revision of expected tax receipts next year. It would be advisable at this stage to presume that what has happened is a one-time rise in receipts, and it would be correct to use that to reduce public debt, the interest payments on which represent a heavy burden on government expenditure.
"Given the lack of clarity about economic developments next year, reducing VAT by 1%, the cost of which is some NIS 4.8 billion, is liable to lead to further expansion of the fiscal deficit next year, and to put at risk the chances of meeting the 2.9% deficit target (which in itself will lead to a rise in the proportion of debt to GDP). Similarly, a VAT cut now will make it hard to meet fiscal targets in the following years, and is not compatible with a consistent taxation policy such as is directed towards achieving long-term goals.
"As mentioned, the weakness in the economy is chiefly in exports and investment, while private consumption continues to grow at a good rate. Therefore, if policy measures are being considered to counter the indications of weakness, it would be preferable to take steps that will assist export industries and investment, rather than giving further support to private consumption."
Published by Globes [online], Israel business news - www.globes-online.com - on September 3, 2015
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