BoI: Gov't must raise taxes to lower deficit

The Bank of Israel warns the government that without expenditure and tax adjustments, the 2013 deficit will reach 4.9%.

13 February 13 12:07, Globes' correspondent

"If the government does not adjust its expenditures, the expected deficit in 2013, based on the costs of the programs approved by the government and the tax rates set in law, is 4.9% of GDP," warns the Bank of Israel in a statement on the budget outlook for 2013. It also says, "If the government aligns the increase in expenditure in 2013 with the expenditure ceiling, and does not change the tax rates set in law, the deficit, based on forecast growth of 3.8%, is expected to be 3.6% of GDP, greater than the new deficit target of 3% of GDP adopted by the government in the summer of 2012."

The Bank of Israel warns, "Bank of Israel projections, based on decisions and programs adopted by the government, forecast expenditures for 2013 to be 9% greater than in the 2012 budget, and NIS 13 billion above the expenditure ceiling according to the expenditure rule approved in 2010. Significant additional gaps exist between the expected cost of the programs approved by the government and the expenditure ceiling in 2014 and 2015."

The Bank of Israel adds, "Without significant adjustment of the government budget both a reduction in government commitments to increased expenditures, and higher tax receipts - the debt to GDP ratio is not expected to decline in the coming years, unless the growth rate is especially high, more than 5% per year, on average."

The Bank of Israel concludes, "To meet the deficit target for 2013, NIS 6 billion in increased tax receipts are necessary, which means, taking into account the effect of taxes on activity, tax rates will have to be increased, or tax exemptions reduced, by the equivalent of NIS 7.5 billion. After 2013, additional tax measures will be necessary."

The difference between upcoming budgets based on the spending caps and the Bank of Israel's projections based on the cost of approved government programs will widen from NIS 9 billion in 2013 to NIS 28 billion in 2015. The 2013 budget based on the spending cap will be NIS 316 billion, and the budget including costs of approved government programs will be NIS 329 billion. The corresponding figures for 2014 are NIS 327 billion and NIS 349 billion, respectively; and for 2015, NIS 338 billion and NIS 366 billion.

The Bank of Israel projects that the debt-to-GDP ratio under legislated tax rates and approved government programs will rise from the current 74% to approach 100% by 2020, if left unchanged.

As for 2012, the Bank of Israel attributes the budget deficit of 4.2% of GDP -compared with the original target of 2%, set in 2010 - to the NIS 14 billion shortfall in revenues. "The balance reflects lower than projected non-tax revenues, for the second consecutive year, and expenditures in excess of the original budget, made possible by the transfer of unutilized balances from previous years' budget," it says.

Published by Globes [online], Israel business news - www.globes-online.com - on February 13, 2013

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