“There is a broad consensus among the professional staff, including in the Ministry of Finance, that taxes should not be cut, given the small surplus in state revenue,” Governor of the Bank of Israel Karnit Flug told foreign reporters at a press conference yesterday. Flug explained that tax revenues in the first quarter were only slightly higher than the projections included in the budget.
Referring to government spending, Flug said, “The structural deficit in Israel is definitely high, and I would not want to see it increase any further.” Flug explained that the Israeli economy was at the peak of the current business cycle, and according to an anti-cycle fiscal policy, this was the time to cut the deficit.
The structural deficit is calculated as government spending minus revenues, excluding one-time revenue. According to the latest Bank of Israel report, the structural deficit rose by over 50% to 3.5% of GDP in 2017, compared with 2.1% in 2016. 80% of the increase in the structural deficit is attributable to an increase in government spending, and the remaining 20% to a decrease in state revenue.
The Bank of Israel report published two weeks ago stated, “At a time of handsome growth and low unemployment, a restrictive policy with a low structural deficit is recommended in order to create room for maneuvering during a period of slowdown.”
The Bank of Israel recommends to the government adding to the increase in social spending “a plan for increasing taxes to the same extent in order to leave room for maneuvering in case the GDP gap widens.”
Published by Globes [online], Israel business news - www.globes-online.com - on April 11, 2018
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