Government Mulling Cuts and Tax Hikes to Curb Spiraling Budget Deficit

The Finance Ministry is expected to present more detailed plans for both proposals to Prime Minister Benjamin Netanyahu within a week.

Moti Bassok
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Moti Bassok

This year's state budget may soon be cut by more than a billion shekels and new taxes generating another billion shekels may be enacted, it was decided at a secret meeting at the Prime Minister's Office yesterday.

The Finance Ministry is expected to present more detailed plans for both proposals to Prime Minister Benjamin Netanyahu within a week.

The intensive talks over new steps to close this year's budget gap began after it became clear that the deficit this year was growing faster than expected, to an extent that could undermine the stability of the economy.

According to the plan taking shape at the Finance Ministry, the billion shekels in cuts would be imposed across the board, on afina uniform basis at all ministries. The taxes would apparently be imposed in four areas, with a tax increase expected on cigarettes; another special tax on alcohol; a tax on jet fuel; and possibly a surtax on the wealthiest taxpayers who have gross incomes of more than a million shekels a year, meaning a monthly income of more than NIS 80,000.

Increased taxation on cigarettes and alcohol is expected to hit weaker segments of society hardest, while the jet fuel tax would hit those wealthy enough to travel abroad, including the middle class. To strike a balance over the impact of the new taxes, a surcharge on the wealthiest taxpayers is being considered, even though in the past Netanyahu and Finance Minister Yuval Steinitz adamantly opposed such a move.

Treasury officials have expressed the view that the four proposed tax measures would be preferable to a rise in the rate of value added tax, which they said would lead to a spiral of price increases. It was also noted that the VAT rate was expected to be increased in any event, probably at the beginning of next year.

Over the past several days, intensive discussions have been held at the Finance Ministry on the growing, yawning budget deficit that is emerging when it comes to this year's revenue and expenditure. The deficit is expected to exceed the revised budget deficit of 3.3% of GDP set by the government for the entire year. The original deficit for 2012 was 2% of GDP. Concern at the treasury recently has been that the government would finish the year with an actual deficit of about NIS 48 billion, which would be in excess of 4% of GDP.

Finance Ministry officials have also been worried that a huge deficit this year would have serious repercussions for the economy, particularly if the current cabinet and Knesset fail to approve next year's state budget by the end of 2012, as appears likely at this point, and if elections are held before next fall.

The treasury discussions over changes to this year's budget are being held concurrently with meetings over the content of 2013 spending plans, as required by Steinitz, because the ministry staff is operating on a business-as-usual basis until any early date for elections is set that would sideline next year's budget.

The meeting on adjustments to this year's budget took place yesterday in the office of the director general of the Prime Minister's Office, Harel Locker, with senior Finance Ministry budget officials and senior members of the prime minister's staff. Netanyahu ordered a total blackout on all of the discussions concerning the budget.

After the Finance Ministry officials stated their positions at the meeting yesterday and suggested alternative measures, it was decided that an additional session would be held within a week.

Prime Minister Netanyahu has ordered a media blackout on 2012 budget adjustments.Credit: Alex Kolomoisky