International credit rating agent Fitch Ratings revised its outlook on Israel’s long-term debt to Positive from Stable last Thursday, while also affirming its A rating.
- Tax Collection in Israel Climbed 5.1% in the First Quarter From a Year Ago, Treasury Reports
- Kahlon and the 'Fictitious Achievement Law' Are Sinking Israel's Economy
- Treasury Lowers Israel's Forecasted Growth Rate for 2016
It’s the latest indication that the treasury has become a tax-collection vacuum, sucking up money even as economic growth has been tepid and rates on key taxes have been cut.
Fitch cited a host of factors, including the country’s current account surplus and its position as a net creditor nation, but also noted Israel’s declining debt relative to gross domestic product and small fiscal deficits.
Last month, the Finance Ministry boosted its forecast for 2016 tax revenues by 600 million shekels ($159.4 million), to 277.9 billion shekels. And it will probably raise it again in coming months, this time to 285 billion shekels – an 8-billion-shekel increase over the sum projected in the budget approved by the Knesset last November.
The treasury’s forecasts are conservative relative to collections made so far this year. In the first quarter, they were up 5.1% from a year earlier, even though both the treasury and Bank of Israel don’t see the economy growing more than 2.8% this year. Trend data show tax collections growing at a 6% annualized rate.
This year’s figures cap a sharp and steady increase in Israel’s tax take. Last year, the treasury collected 270 billion shekels; in 2014 it took in 255.7 billion shekels; 240.6 billion shekels in 2013; and 218.1 billion shekels back in 2010.
What’s more remarkable is that tax collections have been growing even though Finance Minister Moshe Kahlon reduced the value-added tax by one percentage point to 17% last October, while also cutting corporate income tax by 1.5 points to 25% in January. Together, they reduced collections by 5.7 billion shekels, according to treasury estimates.
So how is the treasury squeezing so much tax revenue out of the economy?
Supply-siders might be tempted to attribute rising tax revenues to tax cuts. The Israel Tax Authority credits at least part of the phenomenon to its crackdown on the black market – a drive for which it has hired hundreds of new employees. However, the authority has declined to provide numbers to back up its claim.
Treasury economists, however, ascribe the bigger revenues to an active real estate market, which has boosted property-related taxes; low unemployment, which has boosted personal income tax collections; and high levels of consumer spending, which increases VAT and other revenues.
Unemployment declined to 5.3% last year, its lowest in decades, while the number of people in the workforce has been growing steadily. A large part of the increase is due to ultra-Orthodox men and Israeli-Arab women joining the labor force for the first time. Rising wages, including a hike in the minimum wage, have added to taxable incomes.
Meanwhile, sales of new homes surged more than 40% last year, while prices climbed more than 8%. Kahlon wants to cool down the property market, but for now the purchase taxes the government is collecting are filling treasury coffers. Meanwhile, consumer spending grew 4.9% last year.
The other half of the Fitch upgrade has to do with government spending. Since the start of the year, spending by ministries has risen 8.5% to 63.2 billion shekels – less than the 11% projected in the budget.
Fitch estimates that the government’s budget deficit will widen to 2.9% of GDP – which is equivalent to around 3.5% at international standards – from 2.1% in 2015. But last year was an aberration: It was the government’s smallest deficit since 2008 and came in a year in which the government was without a budget until mid-November, constraining spending.