Treasury Says 2014 Budget Deficit Was Narrowest in 6 Years

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The Knesset Finance Committee discusses the budget on December 8, 2014. The government ended 2014 with its narrowest budget gap in six years.Credit: Emil Salman

Israel’s government ended 2014 with its narrowest budget deficit since 2008, thanks to bigger-than-expected tax collections and lower spending, the Finance Ministry reported on Tuesday.

The deficit shrank to about 30 billion shekels ($7.6 billion), or 2.8% of gross domestic product, even as ministries rushed to spend as much as they could before the end of the year, the Treasury said. The spree accounted for 15.5 billion shekels, a bit more than half, of 2014’s overspending.

The gap compared with the 31.1 billion shekels, or 3% of GDP, that had been budgeted for the year.

This year should also see a deficit of less than 3%.

The 2015 budget that Yair Lapid proposed before he was dismissed last month called for widening the deficit to 3.4%. But the Knesset didn’t approve the spending package before it dispersed for elections, which means spending will continue along 2014 parameters month to month until the next government passes a new budget.

The budget logjam could be seen as good news. In November the credit-rating firm Fitch lowered Israel’s outlook, citing a slower economy and concern about Lapid’s wider budget deficit.

Now, not only is the deficit likely to be smaller but the Bank of Israel and others in recent weeks have been raising their economic-growth forecasts.

Operation Protective Edge - the 50-day war Israel fought with Hamas over the summer - caused defense spending to grow 6% last year, rather than drop by 6.5% as the budget had originally projected.

Spending by civilian ministries grew 2.7% last year, less than half the 7.4% the budget had originally called for.

All told, government spending reached 312.8 billion shekels in 2014, 0.7% less than the 314.9 billion projected in the budget, the Finance Ministry said.

And the government took in revenue of 282.9 billion shekels last year, of which 254.7 billion shekels came from taxes and fees, a 5.3% increase after inflation, the treasury said. December saw a 0.9% drop from a year earlier, to about 21 billion shekels.

The Finance Ministry said tax revenue was 1.9 billion shekels more than projected in the 2014 budget. One reason was higher tax rates: A 1.5-percentage-point rise in the corporate tax rate to 26.5% added 5.1 billion shekels to the take, the treasury said.

On the other hand, the increase over 2013 came even though the government for the first time in two years received no income from so-called trapped corporate profits. Trapped profit is profit an international firm earns in Israel but hasn’t yet repatriated. In 2013 the state offered multinationals a window to pay tax on the profit at a lower rate, garnering 4.3 billion shekels for the year. No tax on trapped profit was paid in 2014.

Moreover, even discounting for higher tax rates, tax revenue last year grew 5.1% after inflation, a rate that exceeded the economy’s growth and reflected stepped-up collections by the Tax Authority and higher capital-gains taxes.