Kahlon’s Consumer-friendly Policies Raising Govt Deficit

But economic growth offsets shrinking tax revenues

Finance Minister Kahlon during a press conference, April, 2017.
Ofer Vaknin

A considerable number of the policies of Finance Minister Moshe Kahlon designed to lower the cost of living are also cutting into government tax revenue. This is apparent from figures released by the Finance Ministry on Sunday on tax revenues and government spending for the month of June.

The government’s cumulative deficit for the 12 months ending in June stood at 2.5% of the country’s gross domestic product and has been increasing over the past six months, but it is still below the initial 2.9% target. The government finished 2016 with a deficit of 2.1% of GDP but by May of this year, the figure for the prior 12 months had risen to 2.4%.

Kahlon, the head of the Kulanu party, ran on a platform that placed reduction of the cost of living in the country front and center, with particular emphasis on housing costs. Kahlon has been attempting to rein in the cost of housing by boosting supply and reducing demand. In the process, however, the government’s purchase tax revenue – which is paid on the sale of real estate – slid 23% compared to June 2016, caused mainly by a decline in the sale of real estate to investors in June 2017. (See further coverage above.)

On the other hand, the general growth of the economy has offset some of the shrinking tax revenue from these particular sources. The Finance Ministry reports that on a nominal basis (not corrected for inflation), tax revenues of all kinds rose by 4.5% in June compared to June of last year.

The deficit as a percentage of GDP is a common measure of a country’s fiscal restraint. At the current clip, the government is expected to meet its 2.9% deficit target for the year. Although the official rate for the 12 months ending June 30 is 2.5%, government sources said they believe the real deficit is higher than the official statistics. The civilian-sector government ministries, which exclude the defense and public security ministries and also exclude the Prime Minister’s Office, are racking up annual deficits of 2.6% to 2.7% of GDP. The sources said the Defense Ministry is spending at a rate that represents an even higher figure.

Even though the current spending pattern doesn’t portend a deficit beyond what was planned, the government finished the year with a deficit in relation to GDP that was smaller than what had initially been planned. We don’t seem to be in store for a repeat this year at the current pace of tax revenue collection.

When it comes to value-added tax collections, in real terms and after adjustments for the timing of VAT refunds, VAT receipts were down 4% in June. About half of the decline is the result of relatively slack motor vehicle sales compared to a year ago.

On the spending side, for the first six months of the year, government ministries have spent 142.9 billion shekels ($40.5 billion), up 9.3% compared to January through June of 2016. (Finance Ministry sources attributed part of the increase to a change in how spending is categorized, explaining that the real increase is about 7.1%,) When it comes to the civilian ministries, the data show a 6.8% increase in spending for the first half of this year – less than the 8.9% that was planned.

Spending on defense, however, has increased 18.1% compared to just 0.7% according to the budget plans, but Finance Ministry sources said that defense spending is not evenly distributed throughout the year, adding that defense spending is subject to supervision and oversight.