Israeli Budget Deficit Narrowing as Tax Collection Improves

The government is also putting a lid on spending, with the deficit coming in well below the target of 3% of gross domestic product.

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Bags, clothes and accessories on display in the new Marc Jacobs pop-up store in the Ramat Aviv Mall, Tel Aviv.
Imported goods. The take from VAT and other indirect taxes is rising. Credit: Sharban Lupu

The government ran a budget deficit of only 900 million shekels ($261 million) in April compared with 2.8 billion a year earlier, as tax collections rose and spending grew slowly.

Over the 12 months between May 2013 and April 2014, the deficit fell to just 2.5% of gross domestic product, the lowest figure in many years, the Finance Ministry said.

The 2.5% is below the government’s 3% target; the deficit as a percentage of GDP has been declining since January. The improvement can be explained in part by the tax increases instituted last summer, including an increase in the value added tax to 18% from 17%. Meanwhile, the government is spending at a slower pace than what was budgeted for.

Between January and April, the deficit came in at about 1 billion shekels, compared with 7.5 billion shekels in the same period last year. Tax receipts ran higher during the four-month period, at 86.4 billion shekels compared with 75.9 billion last year — an increase of 13.8%.

The government’s take from direct taxes, which includes income tax, came to 43.7 billion shekels in January-April, up 16%, while the indirect tax take, which includes VAT, came to 40.7 billion shekels, up 8.4%.

Tax officials say that if the tax-collection pace continues through the end of the year and the Tax Authority makes good on its promise to crack down on unreported income, the government will exceed it 2014 tax-collection target of 257.6 billion shekels by 2 billion to 5 billion shekels.

The Finance Ministry said tax collection was increasing at an annualized rate of about 4% over the past two and a half years. But the increase over the past six months had slowed to 3% after direct-tax collection slowed.

In the four-month period, spending by civilian government ministries was 5.1% higher, even though the budget provided for an increase of 7.6%. Military spending rose 4.8%, though the budget called for a 7% spending cut.

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