2012 Deficit Figures Expose Israeli Government Failure

Expected deficit and tax revenues figures are significantly worse than the goals the state set for itself last year.

The Finance Ministry is set to publish its figures on tax collection and the deficit for 2012 today. No surprises are expected and, as far as is known, the figures will be similar to treasury forecasts published at the end of November - a deficit equal to 4.2% of GDP and tax revenues of around NIS 219 billion. Both figures are particularly bad and show that the government's macroeconomic policy failed in 2012: the figures are significantly worse than the goals the state set for itself last year.

The treasury's initial tax collection goal for 2012 was NIS 232 billion. As early as January last year, all evidence indicated that the first forecast was way off, and it was sliced to NIS 221 billion. In the summer, it became clear that even this was too optimistic because the economy was slowing, so the government raised taxes on cigarettes and beer, and hiked VAT to 17% (up from 16% ). But tax revenues still kept falling. Currently, all signs indicate that the final figure will come out to slightly under NIS 219 billion, which is NIS 2 billion less than the latest official forecast and NIS 13 billion less than the official forecast.

The huge degree by which that forecast missed its target had implications for the deficit as well. The government committed to ending 2012 with a deficit equal to 2% of GDP. But that figure is likely to total 4.2% - more than twice the limit set in law. In 2011, the government missed its deficit target as well, albeit by only 0.3%. Yet both 2011 and 2012 were years of economic growth. Israel missed its targets even though it was not in a financial crisis, further evidence that the economic policies of the past few years have failed.

These budgetary failures have created problems for the 2013 budget as well. This year, the government has committed to increase spending by a massive NIS 30 billion. Since the law allows for an increase of only NIS 15 billion, this means the government needs to find places to slice NIS 12 billion to NIS 15 billion from the state budget.

This year's budget will be one of Israel's strangest. The NIS 15 billion increase in spending - about 3% of the total budget - is the largest in at least a decade, but the budget will also have to undergo one of the largest cuts ever. This, of course, is because the government and treasury lost control over future budget increases: It's allowed to spend an extra NIS 15 billion, but it wants to make that NIS 30 billion.