Flug Calls for Tax Hikes to Close Israel's Budget Hole

Bank of Israel governor says better government services critical for raising labor productivity.

Olivier Fitoussi

Bank of Israel Governor Karnit Flug said the government faces a 14 billion-shekel ($3.65 billion) budget hole next year, about in line with treasury estimates, but said it was in the country’s long-term interest to fill it by increasing taxes rather than cutting spending.

She told a conference of the Israel Economic Association Wednesday that while deregulation would boost economic growth, Israel’s low labor productivity level would be helped mainly by improving the level of public services, including education and technological training and health and welfare, with a particular focus on people not fully in the labor market.

“The government will need to choose between cutting expenditure, which will make it difficult to achieve the long-term goals I will detail later, and increasing tax revenue, whether through the cancellation of exemptions or through raising tax rates,” Flug told the conference.

She said by taking the necessary spending cut or tax hikes, the government was in line to meet its target of keeping the 2017 deficit at 2.5% of GDP. Her remarks come as the treasury begins work on a two-year budget for 2017-18.