Finance Minister Yair Lapid will need to find NIS 12 billion in budget cuts and NIS 8b. more in new taxes in 2015 to stick to the country’s fiscal targets, the Bank of Israel said in its annual report, released Monday.
The situation will only get tougher further down the line: 2016 will need NIS 20b. in cuts and NIS 12b. in tax increases, and 2017 will need NIS 27b.
in cuts and NIS 13b. in tax increases.
Because of the nature of the budgetary rules, which limit increased spending, any of those cases could see lower taxes, but only if they are accompanied by greater cuts. The deficit target shrinks from 3 percent of GDP in 2014 to 2.5% in 2015 and 2% in 2016.
In 2013, the report said, unexpectedly low costs and several one-time tax injections, such as taxes on major exits and a deal for big companies to release “trapped profits,” helped bring the budget in significantly under its unambitious deficit target.
Bank of Israel Governor Karnit Flug explicitly mentioned Lapid’s housing VAT exemption, which she opposed, as adding burden to the budget. The move was estimated to cost NIS 2b. a year, but will likely cost more as the limitations on the exemption erode.
The report showed that the price of housing increased 6% in real terms in 2013, bringing overall real growth since 2008 to approximately 60%. But flug saw a possible light at the end of the tunnel as well.
“Building starts remained elevated in 2013, and in each of the last three years their number was slightly higher than the incremental number of homes needed to supply the housing requirements deriving from demographic growth,” Flug wrote in a letter to the government accompanying the report. “If the number of starts remains high and also includes areas in demand, this could contribute to a reduction in the pressure in the housing market and stabilize and even bring down prices.”
The economy grew at 3.3%, a slight slowdown over the previous year when natural-gas production was taken out of the picture, but significantly better than the OECD average of 1.2%, or the 0.4% economic contraction in the euro zone. Unemployment remained at a historic low, and the Bank of Israel characterized the economy “at full employment.” The central bank projected growth for 2014 at 3.1%.
The slowdown was driven by a reduction in exports, a result both of floundering demand in the world and Israel’s strong currency. Service exports, however, continued to grow.
“Looking ahead, over the long term, economic policy is faced with the dual challenge of ensuring that growth is sustainable and inclusive,” Flug wrote. Improving education across all sectors and creating a more fully integrating labor market were key objectives that would also help bring down the cost of living and allow the government to continue providing a reasonable level of services, she added.
Another key, Flug wrote, was increasing productivity. New research in the report found that Israeli export-oriented industries had far higher productivity than non-export- oriented ones, likely because of the increased competition they face.
Another of the report’s highlights, which were released ahead of its full publication on Monday, included an analysis that the share of Israel’s exports to China’s may double from the current 5% to 10% in 2035.
Emerging markets, and China in particular, are slated to shift global growth’s center of gravity, the report said.
It also touched on Israel’s taxation system, noting that creating a system for mandatory filing should not proceed unless easy, efficient technology were laid out first.