First-half Tax Collections Signal Deeper Fiscal Woes

Low tax revenue threatens to complicate prime minister's efforts to limit tax increases and spending cuts in 2013 budget.

Tax revenues for the first half of the year are well under what treasury planners were counting on - a trend that threatens to complicate Prime Minister Benjamin Netanyahu's efforts to limit tax increases and spending cuts in next year's budget.

The government collected NIS 109.3 billion in taxes and fees in the first half of 2012 - some NIS 2.9 billion less than it has budgeted - which already represented a downgrade on its original forecast. In June the downward trend was exacerbated, with collections amounting to just NIS 16.4 billion - the lowest monthly total since October 2011.

Tax collections grew by just 0.7% after inflation compared with the first half of 2011 - a figure that points to slowing economic growth.

Although the first half of 2012 is a long way from 2013 on the calendar, Finance Ministry planners customarily base their budget planning for the next year and assumptions about economic growth on trends in the first half the current year. Budget planners will have to reduce spending to align it with lower revenue.

Netanyahu won cabinet approval this week to widen the budget deficit to 3% of gross domestic product next year - double the original targeted rate. But even with the more generous deficit, he considered that taxes will have to rise and spending will have to be slashed.

Widening the deficit relieves the prime minster of some difficult political decisions at a time of increasing demands on the budget. But with European struggles with debts and deficits, financial markets are sensitive to any signs that a government has lost control of its overspending.

The Finance Ministry had originally been counting on revenue of NIS 232.3 billion for the whole of 2012, but at the start of the year it revised its forecast down to NIS 221 billion. But with the first-half figures in, officials are now looking for revenues of between NIS 215 billion and NIS 216 billion for the year.

The biggest disappointment in first-half tax collections came in indirect taxes - value-added taxes and customs revenues - which were NIS 1.9 billion short. Direct taxes - income and property taxes - were NIS 700 million short, and fees were NIS 300 million under the forecast.

In June the government's overspending reached NIS 5.4 billion, bringing the totals for the first half of the year to NIS 9.7 billion. By comparison, in the first half of 2011 overspending was just NIS 5.3 billion, according to the treasury.

On the spending side, the situation also looks bad. In June government expenditures reached NIS 23.3 billion, with spending by ministries up more than 14% from a year ago, and nearly 12% higher than the average for the second quarter.

Government spending rose sharply as well throughout the first half, reaching NIS 107.2 billion - up 7.5% from the same period in 2011. The treasury had expected expenses to be higher, but only by 4.9% in its budget forecast. Worse still, ministries are using up their annual budgets at a faster pace than last year: By the end of June they had used 45.5% of their annual allocations - 0.5 percentage point more than in previous years.

The 12-month trailing deficit also continued to widen as it has every month since February. For July 2001 through June 2012 it amounted to NIS 33.1 billion, which is equal to 3.7% of GDP. That puts the rate well ahead of the deficit for 2012, which is budgeted at 3.3% of GDP, or NIS 29.7 billion. That 3.3% deficit is already wider than the 2%, or NIS 18.4 billion, that treasury planners had originally expected.