Steinitz Netanyahu - Michal Fattal - 14112011
Steinitz, left, and Netanyahu. They are quickly losing their economic optimism. Photo by Michal Fattal
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The Israeli economy is slowing down and the Finance Ministry and Bank of Israel are scurrying to find ways to deal with lower economic growth and lower-than-expected tax revenues.

The Finance Ministry is holding urgent meetings on the issue, led by Finance Minister Yuval Steinitz, while Bank of Israel Governor Stanley Fischer is expected to hold a special press conference Tuesday afternoon on the matter. At the press conference, Fischer will present his proposals for dealing with the implications of the global economic slowdown on the Israeli economy.

Prime Minister Benjamin Netanyahu has been kept up to date on recent developments, and has expressed his concerns regarding the clear signs of the economic slowdown.

Original treasury forecasts for tax revenues in 2011 amounted to NIS 213.5 billion; updated forecasts, however, are about NIS 4 billion less. Only two weeks ago, Steinitz told the Knesset Finance Committee that the Israel Tax Authority would actually collect NIS 212.5 billion this year, only a billion shekels below forecasts. Officials are particularly worried about even larger drops in revenues next year - some NIS 10-18 billion less than originally planned, says tax experts at the treasury. Forecasts for economic growth have also been lowered significantly.

Treasury officials have proposed three possible ways of bridging the tax-revenues gap - an across the board cut in spending for all government ministries, increasing the budget deficit next year, or canceling the recommendations of the Trajtenberg Committee on socioeconomic change and raising fuel taxes at the beginning of 2012, as originally planned.

It is also possible that some combination of the three proposals will be adopted.

Steinitz appears to favor a flat cut for all ministries, but it won't apply to the single largest ministry budget - defense.

Raising the budget deficit will certainly not be viewed favorably by international bodies, such as the International Monetary Fund and, especially, the credit-rating agencies; but they may accept the decision considering the circumstances and alternatives.

The gap between forecasted tax revenues and actual collections has been widening in recent months. For the first nine months of 2011, the gap was only NIS 1.3 billion, but this figure doubled in October, and officials fear that November and December will be even worse.

The main problem facing the Finance Ministry is the gap between projected tax revenues and planned spending. Its hands are also tied to a certain extent as the 2012 budget is part of the two-year budget for 2011-2012 on which Steinitz prided himself.

Steinitz rejected proposals this summer to cancel the 2012 budget as passed, and plan it from scratch. A new up-to-date budget would help to meet the changes in priorities that have been made over the past year since the two-year budget was planned. Such changes include the global slowdown, local economic conditions and the response to the summer's social protests.