2013 deficit falls to 3.15% of GDP, comes in below target

Budget spending down from 3.9% in 2012; taxes from major exits, released trapped profits contributed to high revenues.

Finance Minister Yair Lapid 370 (photo credit: Marc Israel Sellem/The Jerusalem Post)
Finance Minister Yair Lapid 370
(photo credit: Marc Israel Sellem/The Jerusalem Post)
The budget deficit in 2013 dropped to 3.15 percent of gross domestic product, below the 4.33% target and the 3.9% one in 2012, the Finance Ministry reported Tuesday.
The NIS 33.2 billion deficit came in below the expected NIS 45.65b. level as a result of NIS 5.7b. in higher-than-expected revenues and NIS 6.7b. in lowerthan- planned spending.
A September change in the GDP calculation method gave the Treasury some breathing room in hitting its financial targets and brought down the figures that appeared in news headlines.
The unambitious 4.65% deficit target dropped to 4.33%, while the new 3.9% calculation for 2012’s deficit failed to erase memories of the inflated 4.2% figure that dominated headlines ahead of last year’s elections.
Yet, much of the deficit reduction was real.
Most of the savings in expenditures – NIS 5.3b. to be exact – came from savings in ministries, which increased their spending from 2012 by 6.6% instead of the planned 8.8%.
On the revenue side, the story was more varied. The government collected NIS 240.3b. in taxes, NIS 5.8b. more than anticipated. That extra boost came mostly from direct taxes, including the release of NIS 4.4b. of “trapped profits” from big companies and lump sums from several major exits by companies such as Waze and Iscar.
Higher value-added tax contributed NIS 8.8b. more in 2013 than in 2012, accounting for about a third of the rise, but came in largely in line with expectations for the budget, adding no surprise funds.
That windfall was somewhat moderated by lower-than-expected National Insurance Institute contributions and lower-than-expected defense aid from foreign countries, which the strong shekel reduced.
“The government’s bank balances rose NIS 7.1 billion as a result of the deficit and its financing,” the Finance Ministry said in its report.
After aggressively raising taxes and cutting back planned spending increases in 2013, Finance Minister Yair Lapid in November reversed course on further income-tax increases for 2014.
While the change is not expected to throw the 2014 budget off its 3% target, the Bank of Israel has warned that new taxes or greater spending cuts will be necessary in 2015 and beyond to hit targets meant to improve the country’s debt burden.
Intelligence Minister Yuval Steinitz, who was finance minister when the deficit unexpectedly ballooned in 2012, on Monday derided Lapid and took credit for the stabilized deficit.
“As I announced in January 2013, the deficit has indeed fallen to the 3% range, mainly due to the deficit-reduction plan I formulated during the previous government,” he said.
Steinitz was responsible for the increase in income and corporate tax in 2013 and part of the VAT hike.
“The irresponsible excesses of Finance Minister Lapid, who complained about his tough inheritance and the frightening deficit of nearly 5%, lacked any professional basis and caused unnecessary panic and real damage to the Israeli economy, including a reduction in the domestic credit rating,” he said.
Although Steinitz’s tax increases certainly contributed to the higher revenue, the Finance Ministry report noted that “because the budget forecast was set only in the month of May 2013 [when the 2013-14 budget was proposed], the surplus was created just in the last eight months of the year.”
A large part came from one-time lump sums, outside the government’s control, and the release of trapped profits, which Lapid helped negotiate, the report said.
Knesset Finance Committee member MK Karin Elharar, from Lapid’s Yesh Atid party, criticized Steinitz for his remarks.
“Steinitz, who in his time created an enormous deficit through irresponsible management, is trying to ride the balance brought on by the current finance minister’s responsible management and on the basis of one-time revenues that came in to the state,” she said.