The government approved a proposal by Finance Minister Moshe Kahlon on Sunday to set budgetary frameworks for the next three years and to release the budget reserve.
The reserve, worth 3.5 billion shekels ($990 million), was set as a defensive mechanism that the finance minister had demanded as part of the state’s two-year budget. The government will discuss how to use the reserve funds in the coming weeks, with a final decision on the matter expected by early December.
Most of the money will likely go to raising disability payments and Kahlon’s Neto Mishpacha plan, which is supposed to help the middle class. Still, Health Minister Yaakov Litzman said in the meeting he’d demand that some of the reserves go to implementing health care reforms.
“Growth seeps downward,” Kahlon said at the meeting, and those at the bottom enjoy more benefits than those at the top. “That’s how a healthy, compassionate society, which also worries about the common good and the weak, looks.”
At the meeting, Bank of Israel Governor Karnit Flug warned: “The emerging picture from the analysis that the budget division presented is that already today, given the government’s commitments and up-to-date revenue forecasts, adjustments will be required between the revenue side and the expense side to meet the physical limits set in law for the coming years.”
She said the steps needed to achieve a target deficit of 2.5% of GDP for 2019 was 10 billion shekels. “Other steps will be required in the years thereafter,” she noted. “These adjustments do not include expenses that will be incurred if the plans implemented through the Neto Mishpacha program will be extended along with increases to disability payments and the decrease of tax revenue due to dividends that were moved up to 2017.”
She said the cyclical deficit is already high compared to OECD countries and is expected to be higher in 2018. “The significance is that should taxes be reduced, there is a high probability that taxes will have to be raised in 2019,” Flug said. “Such swings in tax rates are undesirable for the business sector, and cannot help reach long-term targets,” such as encouraging incentives to work, that reducing taxes can achieve.
Flug warned that while revenues had exceeded forecasts the past four years, recent experience shows developments in the world economy outside of Israel’s control can lead to a sudden drop. She added that tax reductions at this point make a small contribution to expanding economic activity as the country is in a state of full employment, but if economic activity slows down, there will be a need to raise taxes.
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