Scheduled Tax Hike Reversed as PM Says Economy Is in 'Pretty Good' Shape

Both Bank of Israel and OECD express doubt about tax reversal, saying rates will have to rise in subsequent years.

The cabinet on Sunday approved Finance Minister Yair Lapid's proposal to roll back a hike in personal income tax rates due to go into effect at the start of 2014, with Prime Minister Benjamin Netanyahu describing the country’s socio-economic picture as “pretty good.”

“Growth is among the highest in the developed countries, unemployment is among the lowest in the world and Israel is implementing many good things according to other indices as well, including health in which we are ranked very high,” Netanyahu said at the opening on the weekly cabinet meeting, referring to a new report on Israel by the Organization for Economic Cooperation and Development.

“We also heard about things that we need to improve, including the [social] gaps within the State of Israel, which are wide in comparison to the world’s economies … and of course other things that need correcting, including in advancing our education system,” Netanyahu said.

On Sunday, the government was formally given a copy of the 100-plus page document, which gave Israel high marks for economic growth and low unemployment at a time when most the organization’s members, which encompass most of the world’s richest economies, are still struggling with the effects of the 2008-09 financial crisis.

But the report warned that Israel’s fiscal problems are by no means over and faulted Israel for high rates of income inequality and poverty, and poor school performance.

Cancellation of the unpopular tax increases will cost the government 3.3 billion shekels ($940 million) in revenues next year. To compensate, the budget reduces interest rate payments by 2 billion shekels and the treasury’s fiscal reserves by 1.3 billion shekels.

Government revenues have exceeded forecast this year, while spending has come in under target, leaving the government with a surprise fiscal windfall of some 12 billion shekels. That prompted Lapid to recind the tax hike.

In a revised economic outlook released on Sunday, the Treasury estimated that the deficit this year would shrink to just 3% of gross domestic product from a projected 4.65%. That level was expected to hold in 2014 as well, the bank said.

But the OECD warned in its report that, while the government looks on target to meet its fiscal targets for next year, it will have to raise taxes and cut spending in 2015, unless the economy grows 4% that year.

In fact, the OECD projected growth of just 3.5% GDP and concluded: “There would have to be a substantial upside surprise in real GDP growth for deficit targets to be reached without further revenue-raising measures or expenditure cuts.”

Priorities to achieve this should be cutting “inefficient” government spending, cracking down on tax evasion and broadening the tax base, particularly environment-related taxes, the OECD said.

The Bank of Israel, in a report on the fical situation released Sunday, also expressed doubt about the tax cuts, saying that without raising tax rates in the coming years the government will not be able to increase primary civilian expenditure per capita.

It pointed out that spending to which the government is already committed, such as scheduled salary hikes, would raise expenditure in 2015 by 5 billion shekels over the spending ceiling set in law.

Ofer Vaknin