The Finance Ministry announced Friday that it would seek approval for a budget-deficit ceiling this year of 4.65% of gross domestic product. This is less than the 4.9% Finance Minister Yair Lapid previously proposed, but is said to be higher than the figure Bank of Israel Governor Stanley Fischer would reportedly support.

The new target figure is expected to be presented at today’s cabinet meeting, where it is thought it will be approved. The backtracking on the deficit ceiling will reportedly bring forward by two months the increase in value added tax from 17% to 18% − June 1 rather than August 1, as had been proposed.

“Following marathon deliberations, it has been decided to bring to the cabinet for approval on Sunday the following deficit targets: 4.65% for 2013 and 3% for 2014,” a Finance Ministry statement issued Friday read.

On Thursday, rating agency Standard & Poor’s lowered Israel’s local-currency credit rating, but left its foreign-currency credit rating unchanged. The downgrade came a day after reports that Lapid planned to exceed this year’s spending cap in the state budget by NIS 6.5 billion, a move that would have increased the fiscal deficit to 4.9% of gross domestic product, well above the 3% that had been set earlier as a target.

A whirlwind of competing interests and differing viewpoints on the subject have caused Lapid to flip-flop in recent weeks. His most recent position, in support of a 4.65% deficit target rather than the 4.9% he had advocated for just two days earlier, was only finalized on Friday.

The mathematical significance of the minister’s most recent shift is that his ministry staff will have to prepare a budget with a NIS 47 billion deficit rather than the NIS 50 billion in overspending that would have been authorized if a 4.9% deficit target were approved.

Lapid will also be seeking cabinet approval today for an increase in the budget-deficit target for next year from 2.75% of GDP to 3%. His backtracking on the 4.9% deficit for this year will require a series of steps to either increase revenue or cut spending. One of those steps is said to be the increase of the value added tax to 18% on June 1.

The increase of one percentage point is expected to generate an additional NIS 2.5 billion this year in tax revenues − about NIS 700 million more than would be the case if it only goes into effect on August 1. For all of next year, the 18% rate would be expected to generate about NIS 4.4 billion more in taxes than the 17% rate.
Other indirect taxes could also go up on June 1. The Finance Ministry, for example, is looking at the possibility of hiking the tax on cars, gasoline, cigarettes and alcohol, as well as a range of luxury goods.

The initial budget-deficit target for this year, as set by the government headed by Prime Minister Benjamin Netanyahu prior to the January election, was 1.5% of GDP. In the middle of last year, it was amended by the cabinet to 3%. At the time, Bank of Israel chief Fischer opposed the move, saying it should not be increased beyond 2.5%. Two senior officials at the Finance Ministry, budget division director Gal Hershkovitz and accountant general Michal Abadi-Boiangiu, sided with the governor.
After he took office in March, Lapid initially proposed that this year’s deficit target be raised to 4.2%, followed by 3.5% next year.

After a meeting with Fischer at which the Bank of Israel governor opposed any increase above 3%, saying anything more drastic could compromise the stability of the economy, Lapid initially relented, agreeing to the 3% figure. That remained the finance minister’s position for just two weeks, as his ministry mulled the major government spending cuts that such a ceiling would require.

Last Thursday, Lapid informed Harel Locker, director general of the Prime Minister’s Office, that he wanted it increased to 4.9%. This was followed by transatlantic phone calls between Lapid and Fischer ‏(who is presently in the United States‏), in which Fischer was said to have demanded that the figure not exceed 4.5% − what the deficit was in practice for the first quarter of this year.

The bank governor is said to have told Lapid that he would play no part in a deficit ceiling of 4.9%, and that appears to be one of the reasons Lapid decided on Friday’s announcement of a 4.65% proposed budget ceiling.