MERKAVA tank 370.
(photo credit: Michael Shvadron/IDF spokesperson)
The government could aid long-term economic growth if it increases its 2013
deficit target to 3.3 percent of GDP and, among other things, cuts defense
spending by NIS 3 billion, a study released Sunday by the Van Leer Jerusalem
The study estimates that a plan to spread out budget
cuts and tax increases over the course of three years – instead of simply
cutting the required NIS 14b. from the budget and increasing revenues by NIS
5b., as currently required – could increase economic output by 1.1% through
2020, although it would mean tackling the country’s debt less
In a comparison of several different budgetary scenarios,
the study concluded that aiming for a 3.3% instead of a 3% deficit would
ultimately be better for the economy. The scenario that would accomplish this
would raise both taxes and spending by equal levels of NIS 7b. for 2013, and
push additional planned spending increases (and taxes to match) into 2014 and
That plan, it argues, would reduce the nation’s debt burden from
75.2% to 67.6% by 2020; whereas sticking to current deficit targets would bring
it down to 65.2% in the same time-frame.
That would be worth it, the
center argues, for the extra economic growth.
In an econometric analysis
of Israel defense spending over the years, the study found that NIS 3b. more
than necessary is being spent, based on present measures of regional conflict,
US defense expenditures, and enemy defense expenditures.
recommended slashing tax exemptions for capital investment incentives and value
added tax for tourism and Eilat, increasing taxes on natural resources, and
imposing an estate tax.
The paper argues that tax reductions in recent
years provided a short-term stimulus which gave the false impression of
long-term growth, but actually had only a temporary effect that ultimately led
to lower revenues. That, alongside the two-year budget’s inability to predict
revenues accurately for two full years, added to the deficit. The study
recommended avoiding any policy that would reduce demand; and ensuring new tax
revenue balanced all new expenditures shekel for shekel.
According to the
report, the percentage of disposable income taken as transfer payments –
government expenditures that aid the poor by redistributing income – fell from
17% in 2002 to just 13% in 2011. At the same time, the redistribution became
less progressive, providing fewer funds to the poor. A continuing reduction in
transfer payments, the study warned, would produce higher inequality in the
country’s society, already among the worst in the OECD. According to the
center’s analysis, the reduced transfers left no room for further cuts in that
The Van Leer Jerusalem Institute will present the findings of its
study in Jerusalem on Sunday night to a panel of academics and government
officials including Eyal Epstein, who oversees the budget at the Finance
Ministry, Karnit Flug, the deputy governor of the Bank of Israel, and Eugene
Kandel, chairman of the National Economic Council in the Prime Minister’s