As Finance Minister Yair Lapid set out to draft the 2015 budget, he faced competing recommendations on how to handle the country’s fiscal policy.
Bank of Israel Governor Karnit Flug, who is meant to be the primary economic adviser to the government, warned that Lapid should stick to existing rules on spending and deficits to keep Israel on a sustainable path of debt reduction.
The bank wants Lapid to stick to an existing deficit target of 2.5 percent of GDP, which will require him to adjust the budget by NIS 18 billion. At least NIS 7b. of that will have to come from slashing spending and the rest from new revenues.
Lapid, however, has insisted that he would not raise taxes in 2015.
In theory, he could hit the deficit target and keep taxes stable by cutting all NIS 18b. from spending, but that seems a tough option.
According to a Globes report, Lapid will not have a first draft of the budget ready by the start of July, as is customary, because of disagreements with top officials at the Finance Ministry.
A year of landmark tax revenues in 2013, including big-ticket exits such as Waze and agreements with big companies to release “trapped profits” brought the deficit in far below expectations.
Lapid reportedly feels that the aggressive tax measures he took at the behest of his advisers ate into his popularity unnecessarily.
His 0% VAT policy for firsttime home buyers had been publicly objected to by Flug and his top economist, who resigned over the policy. The policy, he said, was not meant to please economists.
Meanwhile, a new study to be released on Wednesday by the Van Leer Institute, suggested that Lapid raised the target deficits planned through 2020 to allow higher levels of expenditure. According to the study, Israel spent less per capita than most OECD nations.
If it sticks to the rules, spending will drop by .5% of GDP by the end of the decade. That course, the study suggested, will actually impede economic growth.
The institute recommended increasing spending on health and education and financing it by eliminating tax breaks.
Lapid has not ruled out raising new revenue by cutting benefits and tax breaks.
The deficit target for 2015 is 2.5% of GDP. To meet the deficit target in 2015, the government will be required to adopt policy measures that will lead to increased revenue totaling about 0.5% of GDP.