High taxes, low spending, and new GDP formula pull down deficit to 3.3%

12-month deficit through August well below the 4.65% target for the year; Finance Minister Lapid welcomes data.

Yair Lapid at Cabinet Meeting, looking official 370 (photo credit: Marc Israel Sellem/The Jerusalem Post)
Yair Lapid at Cabinet Meeting, looking official 370
(photo credit: Marc Israel Sellem/The Jerusalem Post)
A combination of high tax revenues, reduced government spending and a new formula for calculating gross domestic product have brought the 12- month deficit through August down to 3.3 percent of GDP, according to the Finance Ministry – well below the 4.65% target for the year.
News that the deficit had exploded last summer – it measured at 4.2% of GDP at the same time last year, over double the original 2% target – fueled a political backlash and became a subject of debate in January’s general elections. The target for 2012 was raised to 3%, and new taxes were imposed. Using the new formula for measuring GDP, however, last year’s deficit would only have been 3.9%.
The Central Bureau of Statistics changed the GDP formula, which measures economic output, with little fanfare prior to Rosh Hashana. The new formula, which included items such as investments in research and development among a slew of other small changes in the calculation, increased the overall measurement for 2013 by NIS 66 billion, according to Globes.
Because so many fiscal targets are calculated in reference to GDP, the new formula could have longstanding implications for budgetary policy.
The Finance Ministry on Monday said it was weighing the implications on the budget of the new method of calculating GDP.
Finance Minister Yair Lapid, who aggressively raised taxes and cut back planned spending increases, welcomed the data, saying the ministry leadership is paying careful attention to changes in the budget’s implementation.
Lapid came under fire for the heavy-handed budgetary moves he proposed in May; and during the lengthy budget proceedings in the Knesset was forced to soften the blow of some of his harsher policies. Among the less popular changes were higher income taxes; increased value-added tax; new taxes on cigarettes, beer and alcohol; and reductions in child allotments.
Whereas overall spending in 2013 was expected to increase 8.8% from the previous year, actual spending thus far has only increased 4.8%.
The updated budget numbers could bring calls for Lapid to again lower taxes, or reverse spending cuts. That may be difficult, however; many economists forecast that the 2014 budget will overshoot the deficit target of 3%.