Tax cuts are justified, given the low budget deficit and revenue surpluses, senior Ministry of Finance officials said today. At this stage, the Ministry of Finance does not plan to follow the Bank of Israel's example by lowering its 2016 growth forecast, although it does admit that uncertainty about meeting next year's growth targets has increased.
According to the revised forecasts by the Bank of Israel Research Department, the economy is expected to grow only 2.8% in 2016, compared with its previous 3.1% growth forecast.
Initial estimates by the Ministry of Finance show a 2015 budget deficit of 2.3%-2.4%, 0.5% less than the planned 2.9% 2015 budget deficit approved only last month. The natural explanation for the low budget deficit is the fact that a temporary budget that enforced fiscal restraint was in effect until November 19. The Ministry of Finance rejects this assertion, saying that government spending for 2015 will almost reach the legal ceiling of NIS 330 billion. The Ministry of Finance attributes the low budget deficit to tax receipts in excess of the forecasts, projecting tax receipts of NIS 270 billion, NIS 3.5 billion above the revised forecasts by the Ministry of Finance chief economist.
The Ministry of Finance plans to transfer NIS 2.1 billion of this surplus to the defense budget, instead of using it to repay debt. Nevertheless, economists believe that the Minisry of Finance retains enough of a surplus to enable it to reduce Israel's ratio of debt to GDP by 0.3%-0.5%. The decline in the debt-to-GDP ratio, which has been continuous since 2009, is regarded as a key consideration in the international rating agencies' decision not to lower Israel's credit rating, despite the decline in its economic performance.
Most of the increase in state tax revenues in 2015 comes from direct (income) taxes. The Ministry of Finance attributes this to the Israel Tax Authority's success in combating unreported income and collecting more taxes resulting from the voluntary disclosure process and the exposure of owners of foreign bank accounts in Switzerland. The moderate rise in revenues from indirect (consumption) taxes, on the other hand, indicates slow economic growth.
Tax cuts will cost NIS 5 billion
Senior Ministry of Finance officials said today that the tax cuts initiated by Kahlon during the summer were justified. The 1% cut in VAT, which became effective on October 1, was calculated to cost the state NIS 1.3 billion in revenue. A 1.5% corporate tax cut is slated for January 1. These two tax cuts, which are designed to encourage growth, will cut 2016 tax revenues by NIS 5 billion.
The Ministry of Finance opposed Prime Minister Benjamin Netanyahu's plan to introduce a two-year budget for 2017-2018, reported exclusively in "Globes." The Ministry of Finance plans to go ahead with the budget approval processes according to the usual timetable, and to present the budget to the cabinet during the summer, while Netanyahu wants to bring it forward to the spring.
Published by Globes [online], Israel business news - www.globes-online.com - on December 30, 2015
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