Israel's Tax Revenues Keep Growing Despite Slowing Economy

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A shopping mall in Israel. Cohen argues that an additional weekend day will translate into more purchases.
A Israeli shopping mall. The economy grew at a paltry 0.8% annual rate in the first quarter. Credit: Nir Keidar

Israel’s economy is slowing but tax collections keep growing and for 2016 are even likely to beat the upward revision the treasury made in March.

The Finance Ministry said Thursday that tax revenues in May were up 13.7% from a year ago to 26.4 billion shekels ($6.9 billion), after taking into account inflation. That brought the year-to-date total to 120.2.billion shekels, a 5.7% increase after inflation.

Government spending remained in line with projections, rising 7.5% in the first five months of the year from the same time in 2015 to 109.2 billion shekels. Civilian spending climbed 10.7% while defense spending eased 1.3%.

As a result, the budget deficit in the 12 months ending May 31 equaled 2.1% of gross domestic product, or 25.3 billion shekels. That was far under the 35 billion shekels, or 2.9% of GDP, the treasury had forecast for the year.

Officials said that between the narrower deficit and higher tax collections, the budget deficit need not exceed 2.5% of GDP next year. Finance Minister Moshe Kahlon and Prime Minister Benjamin Netanyahu have been urging a wider deficit in order to increase spending on defense and social programs.

The big increases in tax collections stand in sharp contrast to the state of the economy, which grew at a paltry 0.8% annual rate in the first quarter while merchandise exports plunged 21.7%. As a result, forecasters have been lowering their estimates for Israel’s 2016 GDP growth. The Organization for Economic Cooperation and Development, for instance, lowered its 2016 forecast last week to 2.4% from 3.25%.

The May increase was all the more impressive because the treasury said tax refunds jumped 60% from a year ago. Treasury officials said that based on current trends, tax revenues would reach between 285 billion and 290 billion shekels this year, compared with a target of 277.9 million set in March, when officials revised the figure upward.

Two of the reasons for the unusually high collections were a surge in imported cars, on which tax is collected, and bigger-than-expected revenues from land tax, noted Ofer Klein, chief economist at Harel Insurance & Finance. Israel imported 37,200 private vehicles in April and May, up 75% from a year ago, while land tax revenues rose 15% year on year to 1 billion shekels.

Klein added that the big increases in tax collections also reflected growing rates of employment and rising wages.

“Despite the one-time characteristics of some of the [tax] categories, we’re nevertheless looking at a strong indicator of activity on the part of the Israeli consumer and of economic growth in the second quarter, neither of which squares with recent talk about the economy entering a recession,” Klein said.

In May, the government ran a 1.8-billion-shekel budget surplus; for the first five months of the year the number was 700 million shekels, seven times the level during the same period in 2015, the treasury said.

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