Chief economist: We can cut tax benefits

Ministry of Finance Chief Economist Shmuel Abramzon credit: Yossi Zamir
Ministry of Finance Chief Economist Shmuel Abramzon credit: Yossi Zamir

In his first interview as chief economist, Shmuel Abramzon is candid about some sensitive issues, such as financing the war, and haredim in the workforce.

The job of chief economist at the Ministry of Finance may, at times, look frustrating to the onlooker. For four months, as acting chief economist, Dr. Shmuel Abramzon engaged in preparing macro forecasts that were scrapped because of the war. While that might be accepted with understanding, Abramzon is now obliged to work on another forecast that he already knows will in all likelihood become irrelevant.

This prediction is not simply mere guesswork. It is part of the so-called Difference Report, which tests the latest macro forecasts against those of the original budget that was approved in May. On the basis of this report, the state budget for 2024 should be updated. Ministry of Finance and Bank of Israel professionals clearly know that extensive cuts and a shift in priorities are required, such as diverting the NIS 5.5-6 billion of coalition funds to the war effort and post-war reconstruction. However, the decision is stalled with Minister of Finance Bezalel Smotrich, and no one has any idea what the budget will look like and how big the deficit will be.

How can you submit a forecast before you know the data? Won't it have to change immediately after?

"This is exactly the reason why we asked the Knesset to postpone submission of the report. We thought it was irrelevant because the discussions about 2024 are not yet completed," says Abramzon, in his first interview since taking office. "We were handed an insane force majeure event that requires very significant adjustments. We asked Knesset Finance Committee chairperson Moshe Gafni, to associate the Difference Report with the change in the government (the 2024 budget update, O.D.). Because no decision was made, the law compels us to submit it. So, we'll submit a forecast that establishes the current situation, without some of the decisions affecting the situation. But it's not optimal and it's a shame. I imagine they’ll reopen the budget anyway, immediately afterwards."

At the same time, Abramzon is working on the real forecast. This will be submitted to the government in the coming weeks, along with the Ministry of Finance Budget Division’s estimate of expenditure; the budget framework will be determined on the basis of these documents. But right now, less than a month before the end of the year, whether the budget will be ready by 2024 is in doubt. Abramzon says that the window for passing the budget is still "not completely closed". He estimates that "in the second half of December, we’ll provide the government with the update, and then move for quick approval in the Knesset. The government will have to make all of the more complex decisions, on both the revenue and expenditure side."

The Ministry of Finance has difficult work to do in respect of coalition agreements on the budget. You want to make deep cuts, close government ministries, lower the salaries of senior officials. Will you be able to do all this in a few weeks?

"We’re saying that we will do it by the end of the year. If, technically, this does not happen, we’ll enter 2024 with a budget that is irrelevant, and very tight in comparison with the needs that have changed due to the war. This is not an ideal scenario, and therefore the Ministry of Finance is today committed to finishing the work by the end of this year. That is the minister’s directive."

What else will we see in the upcoming budget?

"The discussions have not yet been concluded, but I can say that we’ve heard from the minister that he has no intention of raising taxes next year. He is talking about certain reforms, but I’ll leave it to him to say what they are. There will be needs on the expenditure side, mainly for security. In addition, we, as the professional level, will guide the minister and will also advise him on creating measures that will have an effect in 2025, because we’re looking ahead and it’s clear we’re in a new situation in which there will be a very significant increase in expenditure."

Will you recommend cutting coalition funds?

"In the end, that’s the minister's decision. We will offer him sources to choose from. Obviously, we will prioritize the sources that don’t really support growth. In addition, even on the state revenue side, there are things that can be done that aren’t considered tax hikes, but can support growth and increase the tax base".

Like, for example, canceling the reduction in the fuel excise?

"That will definitely be on the menu. There is a wide set of solutions."

At this point, Abramzon pulls out a forecast, not yet published, detailing the ten tax benefits with the highest cost for 2023. In first place are NIS 24.3 billion in benefits on pension savings. In second place: tax credit points for parents, amounting to NIS 9.6 billion, followed by NIS 7.4 billion in tax exemptions on advanced training funds.

"These are resources we can look at, and things that can be addressed. Obviously, no one will cut everything, but if you think about cutting a little here and a little there, then there’s something to work with. There are also ideas on the tax base and black-market capital, where maybe we could see about increasing tax collection, and other ideas before raising taxes directly. It doesn't have to happen by the end of December, but I would like to see the government asking itself how to rein in the budget and the debt, once we understand the security needs. We will advise the government to create a convergence plan for the coming years that will, at the very least, not allow the debt-to-GDP ratio to continue to rise. That’s very important."

"Haredim must be integrated into the labor market"

Abramzon has served as acting Chief Economist since July, but has not yet received an official appointment. During the last four years, he worked as deputy to the previous chief economist, Shira Greenberg. The latter ended her term in May with extremely harsh warnings about the dire economic consequences of the judicial reform promoted by Smotrich, and the allocation of coalition funds for purposes that do not promote growth, such as subsidizing educational institutions that do not teach the core curriculum.

"The haredim must be integrated into the labor market," says Abramzon. "This is a paramount strategic issue. When the minister took office, we presented him with the demographic data and the employment situation. You must first help him understand the problem. I think this is a problem that has to be faced head on. From there, you can proceed to set of measures, some on the expense side, and we also discussed work incentives."

So, why weren’t you able to persuade Smotrich? The current budget has a record high of coalition funds for the haredim, and even now he refuses to release the bulk of it for other needs.

"The budget issue and the fight over specific budgets that we’re talking about don’t necessarily capture the full picture. For example, beyond the question of whether a few hundred million go this year towards bringing the haredi educational institutions into the Ofek Hadash ("New Horizon") education system reform, it’s very important, as I see it, to know the quality of the teachers in those schools. Ofek Hadash was also supposed to introduce the core curriculum. Will there really be core studies? How good is the supervision? What quality are the teachers? All these things should be discussed. No less than the issue of money, in my view, is the true core issue: whether the haredi education system will be capable of producing the next generation of medical doctors".

Smotrich was in no rush to appoint a replacement for Greenberg. It took him a month and a half to choose Abramzon, and then only on an acting basis. Two more months passed after which the minister announced his intention to appoint Abramzon permanently, but the appointment process at the Civil Service Commission stalled with the outbreak of war.

Some say that the non-permanent appointment is Smotrich's way of putting you in a position where you will have to think three times before making a decision that may not please him.

"I don't feel that at all. After I was in the job for two months, the minister already announced that he wanted to appoint me permanently, and there’s almost no way to reverse course after that. I didn't feel any pressure related to this situation."

Shortly after you took up the post, Smotrich asked you to change the wording in a professional review you prepared, to make the economic situation look better. You refused. How can you work like this? And how did it affect your relationship?

"I don't think it affected the relationship. We moved on. I also don't know who leaked that, and who was briefed, and in general, I don't want to comment on it. I really don't think officials should talk about things that happen between them and the minister of finance behind closed doors. Someone chose to share certain stories, but I sleep very well at night for standing by my professional truth. That is what was in the report, that was how it came out, and I think, with that, we should move on."

Do you feel any involvement from the direction of the minister in the forecasts you’re currently preparing?

"In our professional work, there hasn’t been a shred of involvement by the political echelon at all. Not even a feeling of it."

The growth forecast you released last week was expressed in a rather dry tone relative to the situation. Was that intentional, so as not to upset the minister?

"There was also a reference to risks," says Abramzon, perhaps alluding to Smotrich's failed attempt to remove the risks paragraph from the previous review. "This is a truly professional document, we are satisfied with it, and back it completely."

"Proud of my time at the Kohelet Forum"

At the beginning of our conversation, you mentioned that you worked at the Kohelet Policy Forum. When you were appointed chief economist, you were criticized for supposedly hiding your affiliation with Kohelet. What was that about, in your view?

"I'm proud of my time at Kohelet. It's complete nonsense that this was hidden, it’s all on my LinkedIn profile. It didn't appear in the press release because I had to condense my entire resume into one paragraph. So, I wrote that I worked in research institutes in Israel and abroad. I worked at the Rand Corporation for four years, at Kohelet for five months. That was about 10 years ago. I came back from doing my doctorate in the US, and was looking for a job. I knew I was in the running for a position at the National Economic Council, which I really wanted. Michael Sarel , with whom I was in contact, had just founded the Kohelet Economic Forum, and told me he was looking for economists. We worked on a paper about retirement benefits, I really enjoyed it. The things now being discussed regarding the judicial reform were not on any radar at all."

The growth forecast published this month by the chief economist predicts that the war will cut the GDP growth rate in half in 2024, from an estimated 3.4% to only 1.6%, in the base scenario. Meaning, negative per capita growth. In the more pessimistic scenario of a wider war and slow recovery, growth could deteriorate to the brink of recession at only 0.6%.

What does a percentage point decrease in growth signify for the state revenue?

"Each one percent of GDP in 2024 is worth almost NIS 20 billion. In a normal state of affairs, there really is a fixed ratio between GDP and revenue. The tax burden is equal to about 30% of GDP. In theory, when GDP increases by a percentage point, tax revenue moves with it. But we’re in a crazy situation now. We saw the opposite situation after Covid, when growth was very good, but nothing like the increase in taxes, which simply exploded. For every percentage point of growth, we saw a threefold increase in taxes. Now, unfortunately, we’re in the opposite situation. So, we will assume that the decrease in taxes will be even more dramatic than the decrease in growth. We must remember that our growth will also be sustained by public expenditure."

Published by Globes, Israel business news - - on December 6, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Ministry of Finance Chief Economist Shmuel Abramzon credit: Yossi Zamir
Ministry of Finance Chief Economist Shmuel Abramzon credit: Yossi Zamir
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