Finance Ministry seeks major government cutbacks to halt deficit growth

Additional sources of revenue will include the transfer of funds from Israel’s national lottery company Mifal HaPais and the National Insurance Institute (Bituach Leumi).

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June 14, 2019 02:47
2 minute read.
Moshe Kahlon at a weekly cabinet meeting, December 23rd, 2018

Moshe Kahlon at a weekly cabinet meeting, December 23rd, 2018. (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)

 
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The Finance Ministry presented the Knesset with a multi-year plan on Thursday, further slashing government budgets to prevent the continued growth of the country’s fiscal deficit.

The plan includes cuts to government expenditure, valued at NIS 2.75 billion, and taxation reforms for the years 2020-2022. The cabinet is expected to approve the plan when it is presented by Finance Minister Moshe Kahlon on Sunday.

Should the proposed reforms be implemented, the ministry says, the deficit should decrease to 3.7% by the end of 2022. Should the measures not take effect, however, the deficit could balloon to 4% in 2020 and 2021. The government’s 2019 budget targets a fiscal deficit of 2.9%, equivalent to NIS 40.2 billion.

The cuts to government expenditure follow additional cutbacks valued at NIS 1.15b., set to take effect this year, primarily to transfer finances to the security services and daycare subsidies.

Measures to boost government revenues will include increased taxes on hybrid vehicles. In recent years, there has been a significant increase in purchases of such vehicles, which have benefited from reduced taxation rates. Solvents, used for diluting fuels, will also be taxed.

Additional sources of revenue will include the transfer of funds from Israel’s national lottery company Mifal HaPais and the National Insurance Institute (Bituach Leumi).

Finance Ministry director-general Shai Babad told reporters that the stop-gap plan to increase tax revenues is the result of delays to the 2020 budget caused by the September 17 elections.

“It is almost impossible to narrow the [fiscal] gap because most of the processes cannot be done in a transitional government,” Babad said. “Nobody wanted to be in this situation, but this is a democratic decision and we respect it.”

In April, Bank of Israel governor Prof. Amir Yaron warned the government that the combination of increasing expenditure and the simultaneous reduction of taxes is increasing the nation’s structural deficit to an “undesirable” and potentially dangerous level.

The outgoing government, the central bank said, adopted an expansionary fiscal policy during its term, reflected by a significant increase in public expenditure – notably civilian expenditure – as a share of GDP, alongside a lowering of tax rates.

“The risks inherent in such a situation will increase if the growth rate slows,” said Yaron as he unveiled the bank’s annual report on the state of the economy.

The Finance Ministry will also present the government on Sunday with a growth forecast of 3.1% for 2019 and 3.2% for 2020, according to ministry sources cited by Reuters.

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