Leader sees indirect tax hike to plug budget hole

In its weekly macroeconomic survey, Leader Capital Markets predicts tax hikes in mid- 2012.

Your Taxes_311 (photo credit: Thinkstock/Imagebank)
Your Taxes_311
(photo credit: Thinkstock/Imagebank)
In its weekly macroeconomic survey, Leader Capital Markets predicts tax hikes in mid- 2012, due to the stagnation in tax revenues and the surge in government spending.
“Since the beginning of the year, government spending has risen by a weighted 8.9 percent, compared with last year. Spending by social ministries has risen 9.7%, defense by 8.1%, and economic ministries [a relatively small item] by 42%,” said Leader.
In contrast to the increase in spending, Leader notes that tax revenues are flat. “Indirect taxes fell by 1.4% in the first quarter and by 8% in March, compared with the corresponding periods of last year. The rise in income taxes in January – due to the raising of tax rates from the beginning of January – was temporary and a one-off. The Ministry of Finance is already reporting an estimated shortfall in tax collection of NIS 1.7 billion.
“This forecast estimates NIS 221b. in tax revenues in 2012, and a deficit of 3.3% of GDP. In other words, at the current pace, tax revenues will underperform by at least NIS 8-10b., and the deficit will near 4% of GDP.”
Leader says that in May- June, the government will have to decide on measures to limit the deficit: either budget cuts or tax hikes.
“The current government will find it difficult to cut the big expenditures: education, welfare, and defense. Especially a year before elections, the easier solution will be to raise taxes. Income taxes were already raised in 2012 [income tax, companies tax, dividend tax, capital gains tax], and it will be harder to increase the burden in this area. This leaves the option of raising indirect taxes – on fuel, cigarettes, and alcohol – and we believe VAT as well. A VAT hike could face opposition, which is why the emphasis will be on specific products, and possibly a differential VAT. The Ministry of Finance will not wait for January 1, 2013 to raise indirect taxes, but will try to increase tax revenues in 2012,” Leader said.
Leader is worried by the government decision to again cut the fuel excise. “It seems that the decision was taken under some public pressure in order to prevent the renewal of the social protest,” it said. “All in all, it is illogical to cut the fuel excise, it’s more logical to subsidize public transport. The estimated annual loss of revenues is NIS 500 million, at a time when budget demands are rising and there is a weakness in tax revenues.”
Leader says that the consequences are that the government is sending a negative message about the deficit. “In view of the rising public pressure, it is difficult to expect real budget cuts in next year’s budget. In addition, missile threats and the escalation with Iran will make it difficult to cut the defense budget,” it said.
Leader concluded: “We expect an increase in the tax burden, both from direct taxes [income and companies taxes, and maybe a surtax], but there will be no choice but to raise consumption taxes, including VAT [maybe the Finance Ministry will agree to a differential VAT, with a lower rate for food products]. “In the end, our estimate of a 0.3% effect, at least, on inflation seems reasonable at this time.”