Israel's Tax Collections Surged 8.5% in February

Finance Minister Moshe Kahlon’s vow to cut taxes this year looks increasingly likely to happen after the treasury said Wednesday that tax collections jumped 8.5% in February from a year earlier and the government ran a small fiscal deficit.

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The treasury accountant general’s office said tax revenues reached 23.3 billion shekels ($6.3 billion) in the month, bringing the total for January and February to 51.8 billion shekels, a 5.7% rise from the same time in 2016.

The government ran a 2.9 billion-shekel deficit in February, but for the first two months of the year it was in surplus to the tune of 13 billion shekels. In the 12 months ended February 28, the budget deficit was just 2.1% of gross domestic target, well under the target set by the state budget.

All of that suggests that the 2017 deficit will be less than the 2.9% of GDP set by the Finance Ministry. In 2016, the deficit was just 2.15% of GDP, well under the 2.9% budget planners had expected for the year.

Two months ago Kahlon said in an interview with Channel 2 news that he felt secure in seeking lower taxes this year based on figures for tax collections in 2016, which exceeded the projections in the budget even after they were revised higher several times last year.

A round of reductions in personal and corporate taxes went into effect at the start of this year.

But Bank of Israel Governor Karnit Flug said a month later that the government should refrain from tax cuts and instead step up spending in areas including health care and education, where spending is low compared to other developed economies.

Some economists have warned that the surge in tax collections isn’t sustainable and that the government would be taking a risk by lowering taxes and revenues. The figures for the first two months of this year, however, undermine their case, and economic growth has recently shown signs of picking up from 2016 levels.

The Finance Ministry said that direct taxes, which include taxes on income and real estate, jumped 9.5% in February from a year earlier to 13 billion shekels, which brought the two-month total to 28.9 billion shekels — an increase of 12.7%.

For indirect taxes, which include value-added tax, customs and purchase taxes, the picture was more mixed. In February they were up 8.2% to 9.7 billion shekels, but they were down 2.5% to 21.6 billion shekels in the first two months of the year, treasury figures showed.

Government spending in January-February also grew sharply, led by defense spending. All spending by ministries rose 9.4% from the same period in 2016, to 43.3 billion shekels, but for civilian ministries it was up just 5.2% while defense spending soared 23.9%.

The increase for defense was far above the planned rise for all of 2017, which is just 0.7%. But treasury officials said Wednesday the big jump so far this year was due to technical factors and that the situation will right itself over the next few months and bring the spending rise back inside the target.