Bank of Israel warns of long-term effects of Lapid tax cuts

Monday's announcement calls for no income tax increase; Knesset Finance Committee expresses outrage at Lapid’s decision, calling it "inconsistent."

By NIV ELIS
Lapid looking wary 370 (photo credit: Mark Neiman/GPO)
Lapid looking wary 370
(photo credit: Mark Neiman/GPO)
The Bank of Israel warned on Tuesday that Finance Minister Yair Lapid’s decision to cancel planned income tax increases would present “tough challenges” in sticking to ever-tightening deficit targets in 2015 and beyond.
“The budgetary steps which were decided upon toughen the challenge of meeting the deficit target of 2.5 percent of GDP which was set for 2015,” the bank said in a statement.
“Meeting this target will require extensive policy measures, since the cost of the programs which the government decided on is already greater than the expenditure limit which will allow meeting the target.”
Lapid on Monday changed course on unpopular planned income tax increases for 2014, but said he would cut spending by NIS 3 billion in 2014 to ensure he doesn’t breach that year’s 3% deficit target.
He said he was in talks with Bank of Israel Gov. Karnit Flug and the prime minister’s top economic adviser, Eugene Kandel, to lower the expenditure ceiling, which limits how much government spending can rise from one year to the next (irrespective of the deficit). The BoI said the decision to adjust the ceiling was “appropriate.”
Where’s the money? Lapid said it will come from several sources. Because the 2013 deficit is expected to come out 1.1 percentage points lower than the target of 4.6%, the Finance Ministry will have less interest to pay, meaning less spending off the bat. The rest, he said, would come from reducing the budgetary reserves set aside for emergency spending – a popular source of funds that has been tapped for increases in defense spending – and the ever-popular catchall of “increasing government efficiency.”
The Knesset Finance Committee on Tuesday expressed outrage at Lapid’s decision, calling it “inconsistent,” as committee chairman MK Nissan Slomiansky (Bayit Yehudi) said it would not approve any changes without a full explanation from the Treasury.
“I’ll see to it that MKs will receive answers and, if necessary, put off discussion on certain requests until we receive answers on the matter,” he said at a session approving other changes to the budget.
UTJ MK Ya’acov Litzman went further, accusing Lapid of changing policy positions based on populist sentiment and PR calculations.
“He is the laughingstock of the Knesset and we must not cooperate with him,” he said.
Meretz chairwoman Zehava Gal-On said the process of raising taxes only to lower them to popular adulation was “not a mistake, it is a tactic.”
“Half-a-year ago, when it seemed like there was an extreme deficit, Lapid and Netanyahu passionately advanced a difficult and destructive program of cuts,” she said. “But today, when they discovered huge reserves, out of nowhere, they suddenly run to give tax exemptions to the rich.”
The money would have been better spent on education and other measures to reduce inequality, she added.
The committee linked Lapid’s change of heart on income taxes to his inconsistency on fighting tax evasion.
While the committee approved his proposal to require even small businesses making just NIS 1.5 million a year to report their taxes online, it accused Lapid of backtracking on the limit after the fact.
Ofer Klein, head of the economic research division of Harel Insurance and Finance, predicted that while Lapid’s decision on income taxes reduced the likelihood of hitting future deficit targets, it would at least spurn economic growth through private consumption. That might help the finance minister in the process of trying to raise the growth rate to around 5% from its 2013 projected level of 3.6%.
In a study released Wednesday, the Taub Center for Social Policy said Israel’s constant zigzagging on fiscal issues could be resolved by creating more professional bodies to handle the budgeting process.
“The Israeli budget process is conspicuously lacking in planning and fails to set long-term goals,” wrote Eran Yashiv, the study’s author.
“This makes it difficult for the Israeli government to meet its own set deficit targets, which are then repeatedly modified.”
Creating an institution like the United States’ Congressional Budget Office would help, given that Israel lacks a planning entity “capable of providing data, estimates, or forecasts of this nature or of the required scope,” such as reliable tax revenue forecasts and long-term planning guides.
Such a body could lay out core budgetary guidelines for a decade, including a margin of maneuverability to let policymakers respond to the changing business cycle.