Despite Slow Economy, Tax Revenues Jumped in June

High levels of collection is reducing the budget deficit far under Finance Ministry projections.

Finance Minister Moshe Kahlon speaks at a meeting in the city hall of Ma'alot, northern Israel, May 19, 2016.
Gil Eliahu

Tax revenues grew at an unusually fast pace in June, leaving treasury officials with far more revenues than they ever anticipated in the 2016 budget and a lower fiscal deficit, despite a slowdown in economic growth this year.

The Finance Ministry accountant general reported on Thursday that the tax take for last month reached 22 billion shekels ($5.7 billion), a 9.8% increase from a year earlier. The figure brought collections for the first half of the year to 142.3 billion shekels, a 6.4% year-on-year increase.

With government spending also running mostly under projections, the budget deficit in the 12 months through June was just 2.1% of gross domestic products, well under the 2.9% that the budget sets as a ceiling for all of 2016, the Finance Ministry said.

Treasury economists now believe that tax collections will reach somewhere between 284 billion and 288 billion shekels for all of this year. They have already adjusted their projections upward since the budget was originally passed, but the latest forecast for collections of 277.9 billion shekels will be surpassed by a wide margin.

The surfeit of money flowing into government coffers come as the treasury grapples with a two-year budget to cover the years 2017 and 2018. Officials believe that based on spending rules that determine how big the deficit can be and how much expenses can grow in a year, the government faces a shortfall of 15 billion shekels.

Under the law, the deficit is supposed to be no more than 2.5% of gross domestic product in 2017 and fall to 2.25% in 2018, targets Finance Minister Moshe Kahlon, with the backing of Prime Minister Benjamin Netanyahu, wants to raise to 2.8% in 2017 and 2.5% in 2018 while keeping the targeted rise in spending to 2.7%.

One way to do that is to count on a 6 billion-shekel increase in tax revenues, based on projections for high levels of collections rather than tax hikes, which both men oppose.

However, economists have been downgrading the outlook for the Israeli economy. This week Bank of America Merrill Lynch, for instance, cut its 2016 forecast to 2.4% from 2.7% and its 2017 forecast to 2.8% in 2017 from 3.1%, citing increasing risks to global growth and Israel’s weak first quarter growth figures.

In June, the government ran up its biggest monthly budget deficit of the year of 4.1 billion shekels, but that was mainly due to one-time vacation payments to civil servants. In the first half of the year, the deficit was just 3.4 billion shekels, thanks to two surplus months, down from 3.8 billion the same time in 2015, the treasury said.

Tax collections in the first half of the year exceeded the forecast by 4 billion, it said. One reason was a sharp 40% increase in car imports in the second quarter to 79,000 vehicles on which the state collects steep import taxes.

Nevertheless, Finance Ministry figures showed that the biggest rises were in direct taxes, mainly personal and corporate incomes taxes, which climbed 7.3% in the first half to 73.3 billion shekels. Indirect taxes, which include customs revenues, rose just 5% to 65.4 billion shekels.