Budget Deficit May Be NIS 6 Billion Under Target

Treasury officials attribute narrower overspending to increased tax collection but can’t quite explain how that happened.

Israel Tax Authority offices in Jerusalem.
Lior Mizrahi

The government’s budget deficit will be between 4 billion and 6 billion shekels (about $1 billion-$1.5 billion) less than it had been forecast in 2015, but officials said on Wednesday they are still not entirely sure how that happened.

The final figures on government spending and revenue won’t be in until next month, but officials said the deficit would be far less than the 31.4 billion shekels projected in the original 2015 budget.

Under the abortive budget drafted by Yair Lapid, who was finance minister in the last government, the deficit was supposed to 3.4% of gross domestic product this year and a revised budget by current Finance Minister Moshe Kahlon envisioned a deficit of 2.9%. In fact, the deficit will be between 2.3-2.5%, officials said.

The smaller deficit will enable Israel to show a lower debt-to-GDP ratio, an important indicator for the financial markets and its sovereign credit rating. Israel is one of the few developed countries to have lowered its debt-to-GDP ratio since the 2008 global financial crisis.

Shai Babad, the treasury director-general, attributed the narrower deficit to responsible spending. But the main reason for the unexpectedly low overspending is that tax collections were 11 billion shekels more than the 259.5 billion the treasury had forecast for the year.

Officials speculated that the extra revenue was due to the Tax Authority’s crackdown on the black market economy and stepped-up enforcement generally. They noted that indirect taxes, like the value-added tax, showed no increase this year but neither did they decline despite a one-percentage point reduction in VAT, to 17%, ordered by Kahlon in October.

Treasury officials said the tax figures showed that the Israeli economy was strong and stable even though macroeconomic data point to slackening growth.

The rapid growth of tax collections caused the ministry to revise upwards its target three times over the course of 2015 to a final estimate of 270.2 billion shekels. Officials say even that target may be exceeded by 1 billion to 2 billion shekels.

Israel is cutting the corporate income tax rate in 2016 to 25% from 26.5%. The 2016 deficit target is 2.9% of GDP, with tax collections projected to reach 280.7 million shekels, but the treasury expects economic growth at 3.1% to be better than in 2015 and that the collection target could easily be exceeded.