Governor of the Bank of Israel Karnit Flug is again opposing the use of surplus tax revenues in 2017 to cut taxes. Speaking to the cabinet on the occasion of the Ministry of Finance's presentation of the multi-year budget framework, Flug said, "Given the state of the budget, it is clear that cutting taxes now, which will lower taxes in the coming years, is inconsistent with meeting the fiscal targets for the coming years. This means that if taxes are cut now, it will very likely be necessary to raise them already in 2019. This fluctuation in tax rates is bad for the business sector, and cannot help achieve long-term targets that tax cuts are capable of achieving (encouraging labor, for example)."
Surplus tax collection is projected to exceed NIS 16 billion this year, after the cut in the tax rate on dividends from personal service corporations resulted in a NIS 13 billion one-time jump in tax revenues. An additional NIS 4 billion was collected from taxes paid by Israeli shareholders in Mobileye, which was sold to Intel for $15.3 billion.
Commenting on this, Flug said, "It is important to note that there is no reason to expect further one-time surprises in tax receipts. Although revenues have been higher than the forecast for the past four years, it was not that long ago that tax revenues fell substantially as a result of developments in the global economy, which is absolutely exogenous and beyond the control of policymakers in Israel.
"In addition, cutting taxes at this time will be pro-cyclical, meaning that its contribution to expanding activity will be small, because the economy is at full employment. Pro-cyclicality will be aggravated if cutting taxes now increases the need to raise taxes if an when there is an economic slowdown."
Minister of Finance Moshe Kahlon said at the cabinet meeting, "Growth is trickling down, and the lower income deciles are benefiting from prosperity more than the higher ones." In a prolonged discussion, the cabinet approved Kahlon's proposal to set a budget framework for the next three years and release the budget reserves.
As part of the discussion, NIS 3.5 billion in reserves designed as a protective mechanism demanded by Kahlon in the framework of the two-year budget were released. The cabinet will discuss how this reserve is to be used in the coming weeks.
Among other things, the ministers were shown macroeconomic data for the Israeli economy. Ministry of Finance officials told the ministers that the Israeli economy was showing strong data. The economy is at full employment, unemployment is at an unprecedented low, and the lower income deciles are benefiting more from growth than the upper income deciles. The Ministry of Finance also stated that following the financial accountability law that forbids the government to allocate money without paying for it with spending cuts or new taxes, the trend has reversed, reflected in a marked drop in the liabilities assumed by the government for the coming years.
Published by Globes [online], Israel Business News - www.globes-online.com - on October 29, 2017
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