‘Lapid considering raising deficit target’

The potential move would contradict BoI Governor's recommendations to confront the budget now before it's too late.

April 14, 2013 18:11
2 minute read.
Lapid and Fischer class over budget cuts

Lapid and Fischer 370. (photo credit: courtesy ministry of finance)


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Lapid was reportedly considering raising Israel’s deficit target in order to avoid further budget cuts, a move that would put him at odds with Bank of Israel Gov. Stanley Fischer’s recommendations.

Earlier in the month, Fischer warned that failure to curb the deficit would explode the state’s debt, pushing it as high as 95 percent of GDP by the end of the decade instead of easing it down from its 2012 level of 73% to a sustainable 60%. Israel, Fischer noted, pays a high-risk premium on its debt, meaning that failure to reduce the debt will be very costly in the long run.

“The main problem in the Israeli economy is the budget,” Fischer said at the time.

Even after the government finds some NIS 13 billion in legally mandated cuts, Fischer predicted that the 2013 deficit would overshoot its 3% target by 0.6%.

Dudi Reznick, research director of Leumi Capital Markets, predicted Sunday that the annual deficit could end up as high as 4.5%.

“The central explanation for the growth of the deficit is the decrease in tax revenues, which is a result of slowed economic growth,” he said.

A spokeswoman for Lapid refused to comment on the reports, saying she was not at liberty to discuss details of the budget until after Lapid and Prime Minister Binyamin Netanyahu agreed upon a framework.

Lapid is expected to meet with Fischer before following up on his first budget meeting with Netanyahu later in the week.

Increasing the deficit limit would ease some of the political pressure Lapid faces in cutting the budget for 2013 and 2014.

Rumored cuts of up to NIS 4.5b. from defense and NIS 4b. from child allowances are never politically palatable, notes Ori Greenfeld, senior macroeconomist at Psasgot Investments. Meetings last week with Histadrut labor federation chairman Ofer Eini over NIS 4b. in potential cuts from public sector wages were inconclusive.

On the tax side, Federation of Israeli Chambers of Commerce president Uriel Lynn on Sunday warned against raising corporate tax rates. Lapid himself, trying to stay consistent with his campaign promises of protecting the middle class, ruled out reducing a tax benefit for women worth NIS 700m.

Thus far, the only other concrete portion of his budget strategy Lapid has made public is an increase in luxury goods taxes.

Last summer, Netanyahu and then-finance minister Yuval Steinitz doubled the deficit target from 1.5% to 3% (but included plans to gradually bring it back in line) when it became apparent that projected revenues were not materializing. The deficit for that year settled at 4.2% of GDP.

In related news, the Knesset on Sunday approved Yael Andorn as the Finance Ministry director-general, making her the first woman to fill the position.

“Yael is the right person at the right place, and she has an impressive record both at the Treasury and in the private market,” Lapid said.

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