The government will need to raise another NIS 11 billion in taxes in 2015 and 2016 if it is going to meet its deficit targets, the Bank of Israel said in a report Sunday that sharply criticized the 2013-2014 draft budget.
"The government's spending commitments for 2015 and onward are already about NIS 6 billion more than the ceiling set by law," the central bank said. "If [economic] growth is not especially rapid, then even if the government reduces its spending commitments to be in line with the ceiling, it will need to raise tax revenues further in order to meet deficit targets in 2015 and 2016."
The report is likely to add to the political problems besetting Finance Minister Yair Lapid since taking office in March. He has promised that a painful package of spending cuts and tax contained in the 2013-14 budget are short-term measures and that within two years the worst will be over.
The Bank of Israel report was issued two days before the 2013-2014 budget and Economic Arrangements Bill are scheduled to come up for debate in the Knesset.
The Bank of Israel said the projected spending overruns in 2015 and beyond are due to the fact that a good part of the measures taken by the government to reduce spending in 2014 are nonrecurring. In addition, the treasury has agreed to a supplement to the defense budget starting from 2015.
"Since there is another year and a half until the beginning of budget year 2015, this gap means that in the coming year and a half, the government will not be able to decide on new spending without, at the same time, either reducing other expenditures or risking the adherence to the expenditure ceiling," the report said.
Assuming an average rate of economic growth of 3.2% from 2013 through 2020 and the government makes the necessary fiscal adjustments to stay within the 2015 spending ceiling, the 2015 deficit will exceed the deficit targets set by law even though they were raised in August 2012. The gap will widen in subsequent years.
The Bank of Israel said approximately NIS 4 billion more in tax revenues, equal to 0.4% of GDP, will be needed in 2015 and NIS 7 billion more, or 0.5% of GDP, in 2016 to stay within the deficit ceilings during those two years and resume the decline in the debt to GDP ratio. But it said that if the government increases expenditures according to existing plans without raising tax rates, the deficit will likely stabilize at 3.5% to 4% of GDP and the debt to GDP ratio will keep rising at a moderate rate.
The central bank pointed out that the main factor contributing to the size of the fiscal problem is the absence of any mechanism for overseeing and monitoring the cost of individual programs undertaken by Prime Minster Benjamin Netanyahu's previous government, such as free pre-school education and salary hikes for doctors.
In effect, no one was assessing the impact of the commitments in the framework of the larger budget, such as the ceiling on spending growth and the deficit.
The central bank urged the government to quickly adopt an effective system for monitoring spending to prevent the problem from repeating itself.