Israel's Treasury Grapples With Unusual Problem: Excess Revenue

It will take Finance Ministry officials another two weeks to figure out how much unexpected money they have in the 2013 budget and how to spend it.

Not long ago, in a meeting with top treasury officials, Prime Minister Benjamin Netanyahu asked how much of a surplus there was in the 2013 budget. The official who the prime minister turned to tried to dodge the question, but Netanyahu persisted.

In the end, he got half an answer: Only in the another two weeks, when it has gathered all the data, will the Finance Ministry know exactly how much in unbudgeted surplus funds it has on the books. It’s not unusual for the treasury to keep revenue and expenditures figures close to its chest, the better to direct them to items it deems important and as a reserve.

But this year, the windfall from higher-than-expected taxes and lower-than-expected spending is too big to keep secret. The warnings of a fiscal crunch, issued by Finance Minister Yair Lapid and the treasury mandarins as recently as six months ago, are history.

Tax collection this year will exceed the budget’s projections by some NIS 9 billion, if not more. Meanwhile, major underspending, which has aroused concern of slackening economic growth, amounts to somewhere between NIS 6 billion and NIS 8 billion.

Of course, the government is still running a deficit, but, as November rolls into December, the treasury has seen the fiscal hole it warned about turn into a small mountain.

Three units of the Finance Ministry – tax, budget and state revenue - are now working around the clock ahead of a December 10 deadline, which is when the ministry is supposed to report to the Knesset Finance Committee on how the economy has performed this year and its forecast for 2014.

These are the four questions they are asking themselves:

How much tax will the government collect in 2012?

The target for 2013 was NIS 234.2 billion, but the total will probably reach NIS 242 billion, in part due to unexpectedly large tax payments from companies taking advantage of reduced rates for their so-called “trapped profits.”

The extra revenues could be used to lower taxes in 2014. When the government set its target of NIS 257.6 billion for next year's tax collections, the goal seemed ambitious. Now it appears to be easily obtainable, perhaps too modest given what happened this year. Economists are saying revenues could reach NIS 260 billion or more.

Where will the money come from?

As they go over their projections for next year, officials at the Tax Authority say they are well aware that much of this year’s tax bonanza was due to one-time factors, such as taxes paid on Warren Buffett’s purchase of the Wertheim family’s remaining shares in Iscar. The one-time revenues add up to about NIS 8 billion.

But as former tax chief Yehuda Nasradishi used to say, every year there are unexpected sources of tax revenue. Next year, the state will have sources of revenue it didn’t have this year, the fruit of an increase in tax personnel that will enable it to crack down on black market transactions. The authority estimates this could yield some NIS 2.1 billion.

In addition, the Knesset approved a series of tax hikes last summer on the value-added tax and on tobacco, alcohol and others. These tax hikes didn’t begin generating revenue until the second half of 2013; in 2014, there will be 12 months of revenues from the increases, including NIS 2 billion from the VAT hike alone.

Should scheduled tax increases be rescinded?

Projected economic growth of 3.5% in 2014 and inflation of about 2% will also add to the government’s tax take by some NIS 12 billion over 2013. An increase in personal income tax rates, depending on the threshold by one or two percentage points, next year will generated about NSI 4 billion. A 1.5-point rise in the corporate tax will add another NIS 950 million.

All that comes before any unexpected sources of revenue emerge.

Figures like these have raised the question in the Prime Minister’s Office and at the treasury whether or not to reverse some the tax increase imposed on the public over the past year. One option is to cut VAT by a percentage point to 17% or to cancel the planned increases in corporate and personal income taxes.

Lowering VAT is easy to implement and would help Israel’s lowest income groups, since it is a regressive tax. But it would also cost the government some NIS 4.4 billion in revenues.

How should it be spend?

The 2013 budget called for spending of NIS 395 billion, a figure that is due to grow next year to NIS 406.3 billion. Depending on how much the treasury pushes ministries to spend in the remaining weeks of the year, the 2013 shortfall could reach as much as NIS 8 billion.

Part of the underspending is actual sitting in the treasury budget reserves, away from public view. But the fact of the matter is that ministries have increased spending this year by 5.5% over 2012, rather than the projected 8.8%.

The 2014 budget, which was already approved by the Knesset as a two-year spending package last summer, is more austere than the 2013 budget. That is giving officials wiggle room to be more generous on the expenses side.

The treasury’s budget division is now examining each item in the budget and looking for problems that could be solved with extra spending. Some of this extra spending might come from an accounting fudge that lets official transfer money from the 2013 budget into 2014, often without the public knowing.

Netanyahu and Lapid are likely to favor increasing spending at those ministries that have been hit hard by spending cuts this year and next, rather than simply cutting taxes. Among those likely to enjoy extra appropriations are Welfare, Education and Health.

Emil Salman