Israel Needs $3.6 Billion Tax Hike to Cover Defense Costs, Central Bank Says

Netanyahu favors higher taxes, but if Zionist Camp forms the next government, taxes are not likely to be increased.

Eyal Toueg

The government will need tax hikes of up to 14 billion shekels ($3.6 billion) in the next few years to meet rising defense costs if it is to hit its budget deficit targets, the Bank of Israel said Wednesday.

Before the March 17 election was called in December, the cabinet had approved a 2015 budget draft that boosted spending, mostly on defense, by raising the deficit target to 3.4% of the gross domestic product from 2.5%, a move that angered the central bank.

The treasury paid for last summer’s 50-day war with Hamas and its allies in Gaza without exceeding its 2.8% budget deficit target, but only by cutting public spending, the central bank said. That, the bank said, allowed it to cut interest rates in July and August and narrowing the gap with other countries’ rates.

After the election, the new government will face pressure to increase spending to help ease the rising cost of living and boost education and health care. It will have to decide whether lowering the deficit will be based on further cuts to public spending as a share of GDP, which is lower than most other advanced economies, or raising taxes, which are also lower than in other countries.

Meeting the targets would lower Israel’s debt-to-GDP ratio to 61% by 2020, from about 67%, the bank said, unless extra taxes of 8 billion shekels to 14 billion shekels are imposed. If tax hikes or spending cuts totaling 1.5% of GDP are not made, “the deficit is expected to grow to more than 3% of GDP and the debt-to-GDP ratio is expected to be about 70% of GDP,” it said, noting that its estimates assume economic growth of 3% from 2016 and beyond.

Prime Minister Benjamin Netanyahu favors higher taxes, but if the center-left Zionist Camp forms the next government, taxes are not likely to be increased. A new 2015 budget is not expected to be approved until the middle of the year, after a new governing coalition is in place. The central bank is hoping the new government will contain spending enough to hit a 2015 deficit of 2.6% to 2.7% of GDP.