Kulanu leader Moshe Kahlon.
(photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
It’s the news every citizen wants to hear: Israelis will be getting a tax cut in 2017.
With tax revenues continuing to thrive even as the economy sputters along at an unsatisfying pace, Finance Minister Moshe Kahlon announced on Monday that “in the upcoming budget, we will increase investment, and reduce taxes by a billion shekels.
Speaking at a Kulanu faction meeting, Kahlon explained that “from my perspective, there are two main engines that encourage growth: investments and tax cuts. In the upcoming budget, we are going to dramatically strengthen these two engines, both in investments and in tax cuts.”
When he came into office, Kahlon cut Value Added Tax and the corporate tax rate to help give the economy a push, and Israel’s fiscal performance continued to be strong, with the debt burden falling to 64.9 percent in January.
He may still be on solid fiscal ground to keep the tax cuts coming.
The Bank of Israel’s monthly interest rate report noted that in the first five months of 2016, the government actually accrued a surplus that was NIS 3.5 billion above what it needed to hit the deficit target.
Tax revenues were NIS 1.7 billion higher than expected, and expenditures were NIS 1.8 billion lower than expected. Even VAT revenues were 7.2% higher in real terms than the previous term, despite a lower VAT rate.
The economy, on the other hand, grew at a disappointing 1.3% in the first quarter (though that figure was revised upward from the even more disappointing 0.8% initially reported).
Although BOI noted signs of improvement in the second quarter, they still predicted that 2016 growth would stall at a cool 2.4%, below the 2.8% cited in the previous forecast.
Last week, BofA Merrill Lynch also revised down their estimate for Israel’s growth, citing the weak first quarter and the negative global impact of Brexit, the British vote to leave the European Union.
But some critics worry that the risks of cutting taxes will be amplified by the two-year budget. Yesh Atid leader Yair Lapid, who preceded Kahlon as finance minister, had done away with the two-year budget after the 2011-2012 budget ended in fiscal disaster.
The 2012 deficit came out at over double its target, in part because it was difficult to correctly forecast economic conditions in late 2010, when the two-year budget was passed.
Lapid’s party also noted that Kahlon was only able to cut taxes because Lapid raised them to fix the deficit problem, seemingly with too much success.
“Lowering taxes is welcome, and a process that helps lower the cost of living and works for the middle class,” said Yesh Atid MK Yaakov Peri, citing far more pessimistic budget figures than the Bank of Israel. “But how, exactly, will the Treasury cover the budgetary hole that is already expected to stand at NIS 15 billion shekels?”
Kahlon did not specify how the tax cuts would be structured, or where the investment money would be focused, though that information will be hashed out as budgetary discussions kick off in the coming weeks, with the aim of approving a final budget by November
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