Treasury holding budget cuts till after election

Moshe Kahlon and Shai Babad  photo: Liora Mizrahi

It is not yet clear whether the unusually large tax rebates that caused February's high deficit figure are a one-time event or represent a trend.

The Ministry of Finance has decided to wait with budget cut plans until after Israel's general election on April 9, "Globes" has learned. The background is the fear that the budget hole in 2019 will be in excess of the NIS 10 billion forecast in the Ministry of Finance's latest projections, because of an unexplained rise in tax rebates. Sources also inform "Globes" that the Israel Tax Authority has a different revenues forecast from that of the official Ministry of Finance forecast. According to the Tax Authority's figures, revenues will be some NIS 4 billion lower in 2019 than the official forecast, because of the high tax rebates.

Following internal discussions in the ministry, Ministry of Finance director-general Shai Babad decided that it was too early to tell whether the unusually high tax rebates figures were a trend and not a one-time event. "The coming two months will be critical," Ministry of Finance sources told "Globes" last night. "If we see a decline in the tax rebates, it will be possible to proceed according to the existing format; but if we see a continuing trend, there will be no avoiding a revision of the forecasts and further measures as a consequence of that."

On Thursday night, the Ministry of Finance released figures showing that Israel's cumulative fiscal deficit had grown in the twelve months to February to 3.5% of GDP, which compares with 3.3% in January and 2.9% in December. The most worrying figure as far as Ministry of Finance officials are concerned was tax revenues, which were 6.8% lower last month than in February 2018.

Israel Tax Authority director Eran Yaakov said in the discussions on the matter that the gross tax collection figure was in line with the forecasts, so that there was no concern that economic weakness was the reason behind the decline in revenues. The cause was tax rebates, which totaled NIS 2.6 billion in February, which compares with NIS 1.4 billion in February 2018, representing an 88% rise in real terms. The growth in tax rebates since the beginning of the year is NIS 2 billion, and the concern is that the trend will continue.

There are two schools of thought at the Israel Tax Authority. The conservative school believes that this is a trend that could continue until 2020. The opposing school, which is supported by the Ministry of Finance Chief Economist's Department, holds that we are seeing a one-time phenomenon. Supporters of this approach point out that 90% of the rebates total in February went to four large companies.

The Ministry of Finance's current revenues forecast, published on January 8, sees revenues totaling NIS 350.2 billion in 2019 and a deficit of NIS 50 billion, which is NIS 10 billion more that than the deficit target set when the state budget was approved (2.9% of GDP, or NIS 40 billion). The Israel Tax Authority has a more conservative revenues forecast, which, because of the tax rebates, puts 2019 state revenues NIS 4 billion lower than the official forecast figure.

"We clearly cannot tolerate a situation in which we lose NIS 1-2 billion revenues every month because of tax rebates," Ministry of Finance sources told "Globes", "but only in another two months will we know which of the two schools of thought is right."

Published by Globes, Israel business news - en.globes.co.il - on March 10, 2019

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

Moshe Kahlon and Shai Babad  photo: Liora Mizrahi
Moshe Kahlon and Shai Babad photo: Liora Mizrahi
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