Government expenditure rises, casting doubts on tax cuts

Rony Hizkiyahu Photo: Tamar Matsafi

There are concerns that the macroeconomic data do not support a tax cut.

Figures for the first quarter of 2018 published this week by the Ministry of Finance show that spending by government ministries has grown 9.3% so far this year, compared with the corresponding period last year, based on the same measurement. Ministry of Defense spending was up 8.1% and spending by other ministries rose 9.6%.

The Ministry of Finance is concerned that spending is increasing much faster than planned in the 2018 budget framework. For example, the approved defense budget for 2018 is 0.5% less than the actual defense budget for 2017, and spending by other ministries was planned to rise by 5.3%, compared with actual spending in 2017. Defense spending deviated from the approved budget by NIS 3 billion in 2017; the Ministry of Defense's budget grew by 5.5%, compared with a planned 0.7% rise. Accountant General Rony Hizkiyahu is responsible for maintaining the budget framework. The Ministry of Finance refused to explain the source of the excess spending, and did not respond to questions from “Globes” in the matter. The Ministry of Finance said in an announcement that part of the increase was due to government ministries going on Passover vacation, which resulted in the bringing forward of payments and other expenses scheduled for payment in April.

From a macroeconomic standpoint, government spending as a proportion of GDP rose by only 1% over a year, from 27.6% to 28.5%. State revenues grew by a similar proportion during the same period, but a large part of the increase is attributable to one-time events, headed by the bargain granted of a reduced tax rate on dividends paid by owners of private companies, which is projected to increase tax revenues by NIS 16 billion. State tax revenues rose 4% in the first quarter: revenue from direct taxes (income tax and corporate tax) was up 5% and revenue from indirect taxes (VAT and purchase taxes) only 2%.

The latest spurt in government spending continues the trend in 2017. The Bank of Israel commented on this recently in its report on the state of the economy, noting that the government's structural deficit had grown by 1.4% of GDP in 2017 - the steepest rise in the deficit in recent years. In presenting the report, Bank of Israel Research Department director Prof. Michel Strawczynski emphasized that while the rise in spending was permanent, the source for funding the growing gap between revenue and spending was “a temporary collection surplus in a specific market.” Revenue in 2015 was high because of exceptionally high one-time revenue from real estate taxes. Revenue in 2016 was high because of exceptionally high one-time revenue from purchase taxes on vehicles, and revenue in 2017 were high because of exceptionally high one-time revenue resulting from two major deals for the sale of control in Israeli companies, and as a result of the reduced tax rate on dividends.

As of the end of March, the cumulative budget deficit over the past 12 months was only 1.9% of GDP, but economists believe that if the current rate of increase in spending persists, the government budget deficit will reach the planned 2018 budget deficit of 2.9% of GDP.

What is distorting the picture and giving the impression that the budget deficit is smaller than the true deficit is the fact that a substantial proportion of the proceeds resulting from taxes on dividends that have not yet been paid. The reduced tax rate, in which controlling shareholders in companies pay 25% on a dividend distributed to them by a company under their control, instead of 33%, ended last September. Many taxpayers, however, took advantage of the option of paying the tax in several installments. The Israel Tax Authority also preferred to postpone part of the proceeds from the tax to 2018 out of concern about a steep fall in tax collections following the end of the bargain. Economic sources familiar with the question said that the “noise” on the revenue side caused by the dividend tax bargain kept Minister of Finance Moshe Kahlon from knowing in advance that no large increase in tax revenue could be expected in the first quarter of the year.

Figures for budget performance and tax revenues published this week by the Ministry of Finance show small NIS 700 million surplus in tax collection, confounding the ministry's forecast. The small surplus means that the tax cut promised by Kahlon is much less likely. Kahlon made his promise contingent on the figures for state tax revenues in the first quarter. Given the relatively small surplus, it is likely that the Ministry of Finance's professional echelon will state that the surplus does not indicate a permanent increase in revenue, and that taxes should therefore not be cut, because it is likely that revenue will be less than the forecast during the rest of the year.

Published by Globes [online], Israel business news - www.globes-online.com - on April 11, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Rony Hizkiyahu Photo: Tamar Matsafi
Rony Hizkiyahu Photo: Tamar Matsafi
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