Does the Increase in Tax Revenues Justify a Tax Cut?

On Monday evening, the office of Finance Ministry Accountant General Rony Hizkiyahu released its summary of the government’s tax revenues in the first quarter. They exceeded the initial budget forecast by 700 million shekels (roughly $200 million). Such an excess sum in and of itself would probably only justify a relatively minor tax reduction, but it may be enough for Finance Minister Moshe Kahlon to find a way to announce that he is giving the Israeli public a tax break as the country marks its 70th birthday next week.

As the government takes in more, it is left with the choice of either spending it or returning it to the taxpayers through such a cut. Just before Passover, Kahlon clashed with Karnit Flug, the governor of the Bank of Israel, on the tax reduction matter. The central bank’s annual report warned that further tax reductions are fiscally risky, but Kahlon claims that Flug has predicted trouble for years and has been proven wrong each time. The finance minister contends that lowering taxes gives economic growth a boost. For Kahlon, at least prior to the release of the first-quarter figures, the choice hasn’t been whether to cut taxes but which taxes to cut.

Addressing another issue on Kahlon’s plate, Flug said on Tuesday she has not yet decided whether she would put forward her candidacy for a second term at the helm of the Bank of Israel in the wake of the finance minister’s comment that the search for a new governor would begin soon. Last month, he said the search would start after the Passover holiday.

“There are still seven months until the end of my first term,” Flug said at a news conference. “I haven’t yet thought about it and I have not spoken with the prime minister on that possibility.” Flug also warned of a detrimental effect to Israel’s export-dependent economy should there be an escalation of global trade wars.

Before Passover, Kahlon said that once the holiday was over, he would hold meetings at his ministry to look at the country’s macroeconomic data and then decide accordingly on next steps for the policy of tax cuts that he has pursued since taking office in 2015. The latest report from the accountant general’s office shows that the rise in tax revenues is continuing.

Monday’s was the first report issued since the Tax Authority’s new director, Eran Yaacov, took office. It shows that in March alone, tax revenues rose in real terms (after offsetting legislative changes and the effect of car imports) by 7% over March 2017 to 80.8 billion shekels. For this year as a whole, the state budget provides for a deficit of 38.5 billion shekels, or 2.9% of the country’s gross domestic product. Over the 12-month period from April 2017 through March 2018, the deficit has actually been running at just 1.9% of Israel’s GDP. However, the accountant general’s report notes that during the period from August through October of last year, revenues were exceptionally high, whereas this year from August onward the comparable 12-month accumulated deficit is expected to increase.

Furthermore, on the spending side, for the first three months of 2018, government ministries spent 75.3 billion shekels (not including payment of interest and principal on debt and credit expenses) – 9.3% higher than the same period last year. Defense spending rose 8.1% while expenditures in the civilian governmental sector jumped 9.6%, but the approved state budget provides for just a 5.3% increase in civilian-sector government spending compared to actual expenditures last year. And when it comes to defense spending, the 2018 budget actually calls for a 0.5% cut from last year’s expenditures.

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Reuters contributed to this report.