"In order to meet the deficit target for 2015, a total of about NIS 18 billion in fiscal measures - reducing expenditures as well as steps to increase revenues - will be required," the Bank of Israel has said in its report entitled "Preliminary estimates ahead of the 2015 budget, and fiscal trends for the remainder of the decade." The budget deficit ceiling for 2015 has been set at 2.5% of GDP.
The estimate includes a write-off of NIS 2.5 billion for the government decision to sell new homes to first time buyers at 0% VAT. This decision it is assumed will be implemented in 2015.
The Bank of Israel said, "Assuming that the budget is fully spent, and based on updated macroeconomic projections, the expected deficit for 2014 is close to the target set by the government, 3% of GDP, and the ratio of public debt to GDP is not expected to change significantly this year. Tax revenues are expected to rise by about 5.5-6% in real terms, compared with 2013, due to a large extent to the increase in tax rates in the middle of 2013."
However, the Bank of Israel added, " With that, the many changes that have been made since the middle of 2012 in tax rates and tax regulations, and the unusually low global interest rate environment which encourages financial transactions, some of which generate considerable tax revenues, increase the volatility of tax revenues and the uncertainty regarding their short-term development."
The Bank of Israel continued, "Based on the new fiscal rule, the permitted real increase in the 2015 budget is 2.6%, which means an addition of NIS 8 billion. However, the real rate of increase in the government budget is adjusted each year for the gap between the price forecast used in preparing the previous budget and actual prices. The significance of this adjustment, if implemented, is that the real increase in the 2015 budget will be only 1.1%, or NIS 3.3 billion, and this is after the budget base was already reduced by NIS 3.75 billion in 2014. With that, this year there is a legal question of whether a price adjustment is required, since the government switched to a new expenditure rule and therefore it is not a routine update of the budget based on an existing rule. The decision on this issue will have a significant effect on the composition of the adjustment required to meet the deficit and expenditure targets in the 2015 budget."
The Bank of Israel said, "The expected level of expenditure in the 2015 budget - based on existing activities, demographic trends, and the cost of programs approved by the governmentis markedly higher than the expenditure ceiling set by the fiscal rule. This is despite the assumption that budget demands that have not yet been approved in defense, education, welfare, and health will not be approved without a parallel cut in other budget items."
The Bank of Israel concluded, "Meeting the deficit targets will allow the government to gradually reduce the debt to GDP ratio to about 60% in 2020. However, meeting the expenditure ceiling without measures to increase revenues (including in 2015) will keep the debt to GDP ratio in coming years at its current level, in particular in a case in which no price adjustment is made in 2015."
Published by Globes [online], Israel business news - www.globes-online.com - on May 19, 2014
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