Fiscal Pressures Are Growing as Israel's Defense, Disability Spending Rise

Treasury figures for first quarter 2017 show budget deficit widening as government expenses climb and growth in tax receipts shows signs of slowing

Finance Minister Moshe Kahlon.
Moti Milrod

The pressure on the Finance Ministry to keep government spending in line appeared to be growing on Wednesday as defense costs showed a sharp rise in the first quarter and the budget deficit continued to widen.

The treasury said the defense spending jumped 26.5% in the first quarter of the year to 17.1 billion shekels ($4.7 billion), while spending by civilian ministries grew just 7.3%. All told, spending by ministries was up 11.5% to 69.1 billion shekels.

The budget deficit as a percentage of gross domestic product in the 12 months to March 31 widened to 2.3% from as low as 2% in November, although still well below the 2.9% targeted in the budget.

Meanwhile, the rate of growth for tax collections remained higher, climbing a nominal 5% to 76.2 billion shekels in the three months, compared with a year earlier. However, the pace was the slowest first-quarter increase in four years.

Moreover, while the government collected 1.6 billion shekels more in taxes than forecast in the budget, three-quarters of that was due to one-time receipts, not to fundamental growth of the economy, the Finance Ministry said.

The figures come amid reports that the treasury committee chaired by Prof. Yaron Zelekha, a former treasury accountant general, has recommended doubling the budget for disability allowances to 4 billion shekels.

The recommendations haven’t formally been handed over to Finance Minister Moshe Kahlon, who sources said had looked at them informally and made some recommendations on the report.

However, Kahlon – as well as Prime Minister Benjamin Netanyahu and key Knesset members like David Bitan and Nava Boker  (both of Likud) – support the increase in the disability budget, making it good odds that it will be win cabinet and Knesset approval and be on the books by the end of 2017.

Sources said in all likelihood the 4 billion shekel increase would be spread out over several years to ease pressure on the budget. However, the measure could prove more costly if a measure by MK Ilan Gilon (Meretz), which has already passed its first Knesset hurdle, that would link disability allowances for the 235,00 Israelis entitled to get them to the rises in the minimum wage.

Treasury officials explain away most of the sharp rise in defense spending to technical reasons – one the way U.S. aid is costed in the budget and the other is the 2015 agreement on defense spending between Kahlon and then Defense Minister Moshe Ya'alon.

The Kahon-Ya'alon agreement calls for the Defense Ministry to allocate spending more evenly over the course of the year rather than pushing much of it into the final months of the year as it has in the past, which caused first-quarter spending to soar relative to the same time in 2016.

In any case, defense appropriations are likely to eat up an additional 0.7% of GDP relative to 2016 – and that is before any surprise requests for budget supplements.

Meanwhile, at the civilian ministries, which account for 45% of total spending, expenses are expected to grow in the second half of the year at a much faster pace than they are now.

The growing pressures on the budget come as Kahlon, with the prime minister’s backing, is preparing plans for tax cuts. Apart from a brief announcement last month of the intentions, no details have been released, but they are expected to combine cuts in personal and corporate incomes taxes and in the value-added tax.

However, despite some signs that the tax windfall the government has been enjoying could be winding down, officials are looking forward to a major take from Intel’s $15.3 billion acquisition of the Israeli driverless-technology company Mobileye announced last month.

The treasury’s budget report showed that in March direct taxes, mainly income taxes, continued to grow while indirect taxes like VAT and customers shrank. VAT receipts dropped 3.2% year on year to 8 billion shekels.