Israel's 2012 Budget Deficit Swells to Three-year High as Tax Take Lags

Gap is almost double projections, but Netanyahu, Steinitz vow Israelis won't feel pinch this year from higher taxes or spending cuts.

The government overspent big time last year, preliminary figures from the Finance Ministry released on Sunday showed.

The treasury said the 2012 budget deficit came in at NIS 39 billion, equivalent to 4.2% of gross domestic product. This compares with a deficit of 2%, or overspending of NIS 18.3 billion, that the budget had originally planned for. It was even bigger by a wide margin than the enlarged deficit of 3.4% approved last summer by the cabinet, when it was already becoming apparent that the fiscal situation was unraveling.

The deficit was on its way to becoming the highest since 2009, when Israel was coping with a recession precipitated by the global financial crisis and overspending reached 5.1%. In the years afterward, however, the deficit dropped to 3.8% in 2010 and 3.3% in 2011.

For December alone the deficit was an unusually high NIS 12.8 billion.

The shortfall comes at a difficult time for the economy. GDP growth is expected to slow further this year while the government will not even begin addressing the 2013 budget until a new coalition is formed after the January 22 elections, leaving fiscal policy adrift.

Prime Minister Benjamin Netanyahu, who has emphasized his government's sound management of the economy in the run-up to the elections, sought to play down the importance of the latest news. "I don't think that will have a significant impact on the Israeli citizen," he said in response to the figures.

Finance Minister Yuval Steinitz told Channel 2's financial program he didn't believe there would be any need to raise taxes after the elections, pointing out that a series of tax hikes were put into effect last year.

"We knew in advance that the deficit would be big and took steps to reduce it in 2013," Steinitz said. "We are among the few countries that have lowered our national debt over the past three years."

But Rafael Gozlan, chief economist at IBI - Israel Brokerage & Investments, expressed doubt about that claim. He estimated that the next government, which polls show will be formed by Netanyahu's Likud-Beiteinu Party, would cut between NIS 11 billion and NIS 15 billion from the 2013 scheduled increases to budget, but close the rest of the fiscal hole with taxes and other steps.

"A right-wing-Haredi government is unlikely to cut [child] allowances but would turn to solutions like raising the value-added tax, and stands a good chance of cutting public sector wages and perhaps ending tax exemptions," he wrote.

The main reason for last year's budget shortfall was a lower-than-expected take in tax revenue as a result of the slowing of the economy in Israel and overseas.

The government collected some NIS 218.6 billion in tax revenue last year, 1% less than the NIS 221 billion it had anticipated a year ago when it was already downgrading its forecasts, and almost 6% less than the original projection of NIS 232.3 billion.

In fact, tax revenue grew by 1.6% in 2012 over 2011 after inflation. Revenue from direct taxes grew a real 3.1% last year to NIS 108.3 billion. From indirect taxes, revenues edged up just 0.4% to NIS 105.1 billion.

At one point in the middle of last year, treasury officials feared tax revenue might fall to as low as NIS 216 billion, but economic growth stabilized and the Tax Authority stepped up collection efforts, enabling revenue to exceed the lowest estimates.

Spending also exceeded estimates by NIS 2.2 billion, reaching NIS 285.6 billion, according to the treasury estimates.

In his remarks on the budget, Netanyahu harshly criticized former Prime Minister Ehud Olmert, who recently accused him of wasting NIS 11 billion on preparations for a military strike on Iran that never materialized.

"Olmert's statements are unfortunate and irresponsible, coming from a person who wasted billions on the disengagement and uprooting of Jews," he said, referring to Israel's disengagement from Gaza in 2005. Steinitz echoed the prime minister's remarks, calling Olmert's statement "irresponsible and inexact." He termed the costs related to Iran "a lot lower."

With reporting by Barak Ravid and Eli Ashkenazi

Michal Fattal
Haaretz