Despite Spiking Budget Deficit, Israeli Minister Says He Won't Raise Taxes

Moshe Kahlon predicts the deficit for all of 2018 will be end up being smaller: ' I guarantee that the deficit will not deviate significantly from the target'

Finance Minister Moshe Kahlon, August 14, 2018.
Nir Keidar

Finance Minister Moshe Kahlon said Wednesday he would not raise taxes to help contain a growing budget deficit and predicted that by the end of the year the deficit would not be “significantly” above the target.

Israel’s economy is stronger than ever. I wish all sectors and parts of Israel were as strong as the economy... I guarantee that the deficit will not deviate significantly [from the target]. We haven’t broken the spending framework either,” Kahlon told reporters.

“The tax burden on workers, especially those in the middle class, is heavy. The headlines can scream as much as they want, but I don’t plan to raise taxes,” he said.

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Kahlon was speaking two days after the treasury reported that the government’s fiscal deficit in the 12 months through October had swelled to 3.6% of gross domestic product, putting it on the path to exceed the target of 2.9% for all of 2018. Data this week also showed tax income in the first 10 months of 2018 had fallen from the same period last year despite brisk economic growth.

Kahlon has cut income and value-added taxes since taking office more than three years ago. Going forward, pressure to boost public spending is likely to build in the run-up to an election, which is widely expected to be called for as early as February.

Karnit Flug, who is winding up her term as Bank of Israel governor next week, said in an interview with The Marker Wednesday that she wasn’t concerned that this would be happening as her inexperienced successor, Amir Yaron, steps into the job.

“In general, during election periods, policy tends to focus on the short term. But it happens no matter what, without any connection to who is heading the central bank,” she said.

Flug has repeatedly urged the government not to lower taxes, arguing that the state’s unusually high tax revenues in the past two years have been mostly due to one-time factors. She has warned that the government will struggle to meet all the spending commitments it had made in the years ahead.

In a comment Wednesday, Bank Leumi Chief Economist Gil Bufman said he estimated that the deficit would be about one half a percentage point above the target.But he warned that Israel’s exceeding deficit targets at a time when the business cycle is positive, together with the fact the interest rates are still so low, is leaving the economy unprepared for a possible downturn.

Right now, however, Israel’s economy is forecast by the Bank of Israel to grow by a strong 3.7% this year and to maintain that pace in 2019.