Problems of the Rich?

Israel's Treasury Mulls How to Use NIS 12b Budget Windfall

Increased aid to needy, tax cuts, deficit closure and more on drawing board.

A day after the government found it had earned an unexpected windfall from the “trapped profits," the Finance Ministry on Tuesday began work on plans to make use of the enormous surplus that has developed in this year’s budget.

Finance Minister Yair Lapid instructed Chief Economist Michael Sarel and Budget Division Director Amir Levy to examine the possibility of introducing changes into the 2014 budget, including the possible tax cuts. Their recommendations are to be submitted to Lapid by the end of the month.

Among the options being considered, in conjunction with Tax Authority officials, are rescinding a planned hike in income tax rates of 1 to 2 percentage points slated to go into effect in January. Officials are also weighing canceling the 1.5-point increase in the corporate income tax rate, also due to take effect next year, and/or lowering the value-added tax from 18% to 17%.

Other options would be to raise spending in 2014, among other ways by increasing some National Insurance Institute payments such as child allowances, unemployment benefits and income supplements.

The surplus might also be used to reduce the national debt, as former Bank of Israel Governor Stanley Fischer urged while in office. Israel’s debt now equal 68.5% of gross domestic product, but the government’s goal is to bring it down to 60%, the ceiling set by the European Union’s so-called Maastricht criteria.

Observers said Lapid and Prime Minister Benjamin Netanyahu would almost certainly devote part of the funds to reducing the debt, but the critical question would be how much. As news of the fiscal windfall has begin circulating, calls by various interest groups for lower taxes and increased spending will almost certainly weigh on their final decision.

Spending under target

The 11th-hour success of the Tax Authority’s drive to collect taxes on so-called “trapped profits” brought in NIS 4.4 billion. Added to higher-than-expected tax collections in the first 10 months of the year, the treasury now expects to have collected somewhere between NIS 8 billion and NIS 9 billion in taxes in 2013 than it projected in the budget, according to estimates by economists.

Not only have state revenues exceeded forecasts, but spending has come under target in the 10 months, which officials say could yield another NIS 6 billion to NIS 8 billion. NIS 2.75 billion was transferred to the defense establishment following a decision by the political-security cabinet last week, but that still leaves some NIS 12 billion in unexpected funds, officials said.

All told, officials are not expecting the government to end this year with a deficit equal to just 3% of gross domestic product. The budget had projected a deficit of 4.65% and the 2012 deficit was 3.8%.

The government will not be enjoying another year of tax revenues from trapped profits in 2014, but the budget’s target of raising total revenues of NIS 257.6 billion looks realistic, considering the rate of economic growth and other factors. Unless all or some of the scheduled tax hikes for 2014 are rescinded, the treasury may well find itself with tax revenues in excess of what it projected for the year.

Ofer Vaknin