First-quarter Budget Deficit Swells on Falling Tax Revenue

As treasury forecasts fall far short, 2013 budget is put on hold.

The state budget deficit is running much higher than forecast as first-quarter tax revenues fell far short of the Finance Ministry's targets, and those of Finance Minister Yuval Steinitz .

If tax revenues continue to suffer, even the treasury's updated deficit forecast of 3.3% of gross domestic product will be much too optimistic. The current trend indicates a deficit of between 3.5% and 4% of GDP for 2012.

Steinitz - Salman - 8.5.12
Emil Salman

The government's original 2012 forecasts were for tax revenues of NIS 232 billion and a deficit of NIS 18 billion, about 2% of GDP. But by the end of last year, it was clear this wasn't to be. So the treasury revised its forecasts down early this year. It said tax revenues would come in at only NIS 221 billion, while the deficit would approach NIS 30 billion, some 3.3% of GDP.

But even this forecast was much too high. The treasury's State Revenues Administration said the new tax revenue target was NIS 1.8 billion too high for the first four months of the year. On an annual basis, this translates into tax revenues of only NIS 215 billion - NIS 6 billion below the already adjusted figures.

In this case, the deficit would swell to NIS 35 billion, some 3.8% of GDP. This is the figure forecast by rating agency S&P Maalot.

As a result, the Finance Ministry is now predicting a deficit of between 3.5% and 4%, twice the original forecast when the 2012 budget was drawn up. This follows the 3.3% deficit in 2011, which was also much higher than planned.

There are still no targets for the 2013 budget, which will not see any real progress until after the elections in September. But given the spending ceiling in force for 2013, which is based on a 3% spending increase and the assumption that the tax-revenue trend won't improve much, 2012 will also show a budget deficit of 3% to 4%. This would mark three years in a row of significantly higher deficits than planned.

Of course, all the figures forecast for 2013 are based on the assumption that there will be no major changes in taxes or spending - a situation that will probably change after the September elections. If Israel misses deficit targets, it will be violating its fiscal policies of the past decade, even though investors have been suspicious about countries that miss such targets during the European and global debt crisis.