Kahlon to Take Over Israeli Treasury With Unusually Healthy Budget

First-quarter figures show tax collections exceeded target by 3 billion shekels.

AP

Moshe Kahlon looks destined to be the lucky finance minister.

In contrast to his predecessor, Yair Lapid, who entered office with a massive budget hole, Kahlon will be taking over a treasury that has over the past months been collecting tax revenues at a far higher level than officials had forecast.

In the first quarter, tax collections exceeded projections by 3 billion shekels ($770 million), the treasury reported over the weekend. Tax revenues were up 5.3% after inflation in the first three months of the year at 69.4 billion shekels, compared with the same time in 2014.

Economists outside the treasury say the first-quarter figures point to extra revenue of between 12 billion and 16 billion shekels for all of 2015. The government could end 2015 with a budget surplus of 1 billion shekels.

From the point of view of treasury officials, however, the good news isn’t something they want to broadcast. With negotiations to form the next government still two weeks or more away from concluding, they fear politicians will look on the budget billions as ripe for the taking as part of coalition deals.

The fact the government is working without a 2015 budget – because the Knesset dispersed for the election without approving one – only makes the budget more vulnerable, officials worry. The ultra-Orthodox parties alone are seeking 3 billion shekels to fund their institutions and increased child allowances.

Kahlon, who campaigned on a platform of helping lower-income Israelis, may try to lower the value-added tax, which was raised to 18% under his two predecessors, or try to reduce defense spending.

In 2007, the last time Israel was in such an enviable fiscal situation, Bank of Israel Governor Stanley Fischer won the day. Finance Ministry officials wanted to step up spending on education, health and welfare, but Fischer said any surplus should go to paying down Israeli official debt, a policy that has been in place since then.

At the end of 2014, government debt stood at 67.6% of gross domestic product, and the government’s goal is to reduce that to 60% by 2020. Compared to similar economies, like Poland and South Korea, that’s a relatively high level. The higher repayment and interest costs means there is less to spend on everything else.

The debate over the 2015 budget in the new government will focus to a large extent on how big a deficit to allow. It was supposed to be 2.5% of GDP, but in his abortive 2015 budget Lapid convinced the cabinet to let it rise to 3.4%, adding up to an extra 10 billion shekels of spending.

The year 2016 presents bigger problems. The deficit target is an ambitious 2% of GDP, which the Bank of Israel believes to be very problematic unless tax collections continue rising sharply.

“Even without any new decisions to increase spending, the government will have to trim 8 billion shekels from existing spending in 2016 just to avoid exceeding the ceiling in spending growth,” Adi Brander, head of the central bank’s economic research, told TheMarker. “To reduce the deficit to 2% in 2016, as required by law, it will have to raises taxes or remove exemptions.”