BoI: Without tax hike, state deficit will hit 4.9%

If the government does not cut expenditures to legal levels and raise revenues by NIS 7.5 billion, the budget deficit will hit 4.9 percent of GDP in 2013, according to new projections the Bank of Israel released on Wednesday.

In setting the 2013 state budget, the next government must adhere to two laws, one that caps spending growth at 5%, and another that targets the overall budget deficit, now set at 3%.

According to the projections, spending forecasts for 2013 are 9% greater than the 2012 budget, and must be cut by NIS 13b. to keep within the spending guidelines.

That should come as a bit of a relief for the government; previous projections put the amount at NIS 14b., meaning that it now has an extra billion shekels of wiggle room in budget negotiations.

The relief ends there, however.

Even with spending cuts set to the legal level, the government will not bring in enough revenue to keep the deficit under the 3% target.

According to the report, only lowering expenditures would leave the country with a 3.6% deficit, meaning it will have to raise more money, either through increasing taxes or slashing exemptions.

“To meet the deficit target for 2013, NIS 6b. 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 7.5b.,” the report said. The NIS 1.5b. gap between the two figures comes because tax increases would reduce economic activity.

Spending projections for 2014 and 2015 will require even more cuts down the road to keep within the legal framework, according to the report, requiring NIS 22b. and NIS 27b. in cuts, respectively.

Without significant budgetary action, the country’s overall debt burden will reach nearly 95% of its annual output by the end of the decade. If the government sticks to its current deficit targets, the debt will fall from its current 74% of GNP to 65% by 2020.

In its own quiet, technocratic way, the Bank of Israel report took Prime Minister Binyamin Netanyahu to task for allowing the 2012 deficit to balloon to 4.2%, more than double the original target.

“Most of the gap was already identified during 2011, and, at the end of 2011, the government accordingly increased the forecast deficit to 3.4% of GDP,” the report said. “However, as it operated within the framework of a two-year budget, no adjustments were made at that time in order to reduce the deficit. It was only in the second half of 2012, as the deficit continued to grow, that the government decided to increase tax rates in order to reduce the deficit, primarily heading into 2013.”

Lower-than-projected revenues resulting from lackluster wage growth and new home sales were the culprit behind most of the 2012 deficit, it concluded.