2013 Tax Revenues Unlikely to Meet Projections, Knesset Report Says

Revenues will fall NIS 2 billion short of finance ministry projection for 2013, new study estimates.

Tax revenues will fall NIS 2 billion short of the Finance Ministry’s NIS 236 billion projection for this year if collection continues at their current pace, the Knesset Research and Information Center said in a report released on Wednesday.

In the first five months of the year, the government took in NIS 97.5 billion in taxes, or NIS 234 billion on an annual basis, according to the report handed to the Knesset Finance Committee as it began debate on the ministry’s revenue projections over the years.

The treasury’s ability to predict revenues is critical as the government struggles to rein in deficit spending. On Tuesday, MKs approved the first reading of the 2013-14 budget, but the package faces a rough ride in the Knesset with its big spending cuts and tax increases. Treasury officials were forced to take those controversial measures partly because tax revenues are falling short of ministry forecasts.

To a large extent, rises and falls in tax revenues are based on economic activity, but the research center said it was impossible to project economic activity a year or more in advance − as officials tried to do when they crafted the 2011-12 budget in mid-2010.

The government has since decided to return to annual budgets, but because the Knesset has yet to approve a 2013 budget, the package under debate will cover the rest of this year and all of 2014. For now the government is operating based on the 2012 budget.

The research center criticized the policy of two-year budgets that the previous government had adopted. But it noted that for well over a decade the ministry’s forecasts have been shaky. “There has been a discrepancy between the state revenue forecast from taxes and actual revenues every year from 1999 to 2012, with the exception of 2005,” the report said.

The largest shortfall topped NIS 14 billion in 2002, 2003 and 2012. Last year the state took in NIS 219.3 billion in taxes and other fees, but the treasury had expected NIS 233.8 billion. This contributed to a ballooning deficit of 4.2% of gross domestic product, a number expected to rise to 4.65% this year before falling to 3% in 2014.

The proportion of tax revenues generated by direct taxes such as income tax is below average for countries in the Organization for Economic Cooperation and Development. But the proportion of indirect taxes such as value-added tax and customs is above the OECD average, the research center noted.

This balance comes at the expense of lower income groups because rich and poor pay indirect taxes at the same rate. On the other hand, Israel’s income tax rates are more progressive than in many other developed countries, the report said. 

Olivier Fitoussi