Budget Deficit Widens in June as Tax Income Shrinks

But fiscal performance remains strong as the government begins its 2015 budget deliberations.

Israel Tax Authority offices in Jerusalem.
Lior Mizrahi

Some of the glow from the government’s stellar fiscal performance this year faded in June as tax revenues declined, widening the budget deficit for the first time this year, the Finance Ministry said Tuesday.

Tax revenues declined 5.5% after inflation to 18.4 billion shekels ($5.4 billion), while spending rose due to extra payments owed to civil servants, the treasury said. Revenue from direct taxes, mainly income and property taxes, dropped 8.4% from a year earlier, while indirect tax revenue, mainly value-added tax, fell 3.4%.

As a result, the fiscal deficit for June reached 4.9 billion shekels, up from 3.7 billion shekels a year ago. That meant that the budget deficit for the 12 months to June 20 rose to 2.5% of gross domestic product, up 0.1 percentage point from May, the Finance Ministry said.

Still, Israel is exceeding its fiscal targets for the year even as the economy has begun showing signs of slowing growth. The treasury said tax revenue for the first half the year rose 7.7% after inflation to 127.3 billion shekels and is on target to meet the 254.3 billion shekels projected in the budget.

Moreover, the deficit for the first half the year came to just 4 billion shekels, down from 10.2 billion a year earlier. Thus, even though the deficit widened slightly in June, it remains well below the 3% targeted by the 2014 budget.

The strong fiscal performance comes as the government begins difficult deliberations over the 2015 budget. The Defense Ministry is asking for additional appropriations of as much as 4 billion shekels, while a plan to exempt many home buyers from value-added tax will deprive the government of some 2.4 billion shekels in revenues every year.

Moreover, economic growth has been tailing off, threatening to pinch tax revenues. Treasury Chief Economist Yoel Naveh said this week that GDP growth would probably ease to 2.9% a year between 2013 and 2019 from an average of 4.5% in the two decades to 2010.

Finance Minister Yair Lapid is pushing for a budget-deficit target of 2.9% of GDP for next year, instead of 2.5% as planned, in order to minimize the spending cutbacks. That would let the government spend 32 billion shekels more than it took in next year.

Lapid paid a heavy political price for the fiscal retrenchment he ordered when he assumed office for the 2014 budget, aiming to close a massive deficit hole that had developed under his predecessor.

The treasury said Tuesday that government spending grew 3.9% in the first six months of the year from the same time in 2013 to 117.1 billion shekels, with civilian spending up 4.3% and defense spending down 0.6%.