In the Money

The Israeli Treasury's Dubious Reason for Axeing a Tax Hike

In the choice between more spending and taxes or less, Netanyahu and Lapid’s stance is clear: less.

Excess budget allocations. That was the reason the Finance Ministry gave Monday for what happened. They made a mistake and put too much into the budget, so the problem had to be fixed.

The correction has obviously been performed responsibly: The excess allocations are being reduced, along with revenues. Actually, the revenue cut is the cancellation of the income-tax hike planned for January 1.

If this explanation sounds dubious, you’re probably right. What happened was probably the other way around: Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid wanted to reduce taxes and sent the treasury out on a mission to find reasons for doing so.

Since the treasury officials didn’t want to act irresponsibly by just lowering taxes and risking a breach of the deficit target, they conjured up a compromise. The income-tax hike would be rescinded as the politicians had demanded, but with a spending cut, balancing things out. That’s how the innovative line about excess allocations arose.

So which really came first, the desire to reduce taxes or the suddenly-discovered excess allocations? We’ll probably never know and have a tough time providing answers for questions arising from this inventive move.

First, how did these excess allocations come about? After all, only six months ago we needed to cut spending by an enormous NIS 18 billion. Now suddenly there’s a surplus – and in nothing other than amorphous items like interest payments and budget reserves.

The immediate suspicion is that the Finance Ministry, in a fit of panic six months ago, built excessive hidden reserves into the budget and now has no choice but to reveal their existence and eliminate them.

Another possibility is that, with utmost caution, the treasury created budget reserves and is now throwing caution to the wind and depleting them, despite concerns about declining growth in 2014. In other words, political pressure has pushed conservatism to the wayside.

What’s the correct explanation? Once again, we’ll probably never know.

Second, even if excess allocations really exist, should they be eliminated? The Finance Ministry could have stuck to its original budget outline, including the income-tax hike, and use the excess allocations to boost funding for a number of vital activities, or to reduce the deficit.

The planned deficit for 2014 is 3% of gross domestic product following a compromise between Lapid and former Bank of Israel Governor Stanley Fischer, who wanted it reduced. Would it have been so terrible if we accumulated excess allocations and used them to pay down the debt quicker?

This question, a matter of outlook, also goes unanswered. In the choice between more spending and taxes or less, the answer provided by Netanyahu and Lapid is clear: less.

In this case the treasury chiefs support them, at least with lip service, out of fear that the excess allocations will lead to wasteful spending. This is obviously an odd position because excess allocations don’t necessarily lead to waste and, again, they could be used conservatively to reduce the deficit and debt.

The finance minister and prime minister’s resolve apparently won out. We can only hope that this won’t be a mistake if, heaven forbid, next year’s growth is disappointing.

And one final point: The spending reduction will be extended to the following years since the 2015 budget increase will be based on the smaller 2014 budget. So in this way the treasury has cut back on spending growth for several years. One could argue whether this is good or bad.

Former Finance Minister Yair Lapid and Prime Minister Benjamin Netanyahu.
Oren Nachshon