3% increase to budget deficit target approved

The cabinet on Sunday approved doubling the 2013 budget deficit target to 3 percent of gross domestic product, despite strong opposition from central bank and Treasury officials. It also agreed to set a new long-term target of gradually reducing the deficit back to 1.5% by 2019.

“I think this is the right dosage,” Prime Minister Binyamin Netanyahu said at the opening of the weekly cabinet meeting.

The revised target meets the European Union standard, he continued, pointing out that Germany is perhaps the only member state running a deficit of under 3%.

“What we are not doing is changing the expenditure target. In the end, what the government controls is the expenditure target, and we are sticking to that scrupulously as we have always done,” Netanyahu said.

He said “certain taxes” will be raised next year, and that other measures will be adopted to ensure both the expenditure and deficit targets are met. But, he added, “I did not want, not in 2003 when I was finance minister and not now... to increase the tax burden too much. When you increase the tax burden, you reduce growth. And when you reduce growth, you increase unemployment and ultimately increase the deficit.”

Finance Minister Yuval Steinitz said the new targets were consistent with the government’s policy of maintaining fiscal responsibility and would enable it to continue on the road toward achieving a 60% debt-to-GDP ratio. This also happens to be the target agreed to by EU members. In 2011, Israel’s debt was about 74% of GDP.

Netanyahu and Steinitz’s plan received plenty of criticism after it was revealed last week, with Bank of Israel Gov. Stanley Fischer and Treasury Budgets director Gal Hershkovitz among those who urged them to revise the target to 2.5%. Fischer, who rarely voices disapproval of government policy in public, warned the move could have disastrous consequences for the economy.

The deficit is likely to reach 3.5-4% this year, Fischer said on Thursday at the annual Caesarea Forum at the Dead Sea, adding that it could spiral to 7- 8% in the event of unexpected tax revenue shortfalls. If such a scenario were to occur, he warned, “we would not be able to deal with that.”

Opposition leader Shelly Yechimovich also criticized the plan, but for different reasons: She said it did not go far enough.

Corinne Sauer, director of the Jerusalem Institute of Market Studies, warned on Sunday that the move would pose a danger to the economy. A higher deficit means the government will be forced to raise taxes to pay off debts in a few years, “and Israelis are already protesting the heavy tax burden,” she said, adding that a better path would have been budgetary prudence and lower taxes.

“Of the 192 days a year Israelis work to fund the government, 68 of those are used to pay off past debts. This is a reminder that when governments take out loans to finance their expenditures, the dubious short-term benefits of such an action usually lead to a substantial increase in the tax burden on future generations,” she said.

Sauer made the comments as JIMS released data showing that Israelis will work 192 days for the government this year and only start earning money for private consumption and savings on July 9. “Tax Freedom Day,” the date each year when people begin to earn for themselves, came 11 days later for Israelis in 2012 than it did last year, the institute’s research found. It marks a return to the situation Israelis found themselves in every year from 1990 to 2009 – when they worked more for the government than for themselves.

Tax Freedom Day is calculated by taking the ratio of total taxes paid by the population over Net National Income. Total taxes include not just income tax, but also VAT, municipal, import, corporate, car and fuel taxes, and more. According to JIMS, Israel’s Net National Income is expected to increase by 3.2% this year, but tax revenues are forecast to grow by close to 10%.

Israel’s tax burden is higher than in the US, which celebrated Tax Freedom Day on April 17, the UK, which marked it on May 29, and Canada, which marked it on June 11, JIMS said. But the burden is lower than in many European countries, including in Germany, France, Belgium and Hungary.