Israel's Treasury Unveils 2017-18 Budget, With Tax Reductions and $520 Million in Spending Cuts

The proposal would raise the deficit, upsetting a long-term strategy of bringing it down.

Finance Minister Moshe Kahlon, March 30, 2016.
Ofer Vaknin

The treasury released its long-awaited 2017-18 budget proposal on Monday, which calls for across-the-board spending cuts of 2 billion shekels ($520 million) for all ministries as well as plans to squeeze money from non-tax sources.

But, while the treasury is planning spending cuts, the budget also calls for tax cuts for households and corporations.

The spending package, which was scored by both the Bank of Israel and opposition lawmakers, is due to go the cabinet on Thursday for approval. Here are its major facets:

The across-the-board cut for ministries aims to save about 2 billion shekels annually. The biggest cuts will come at the expense of the Defense Ministry (336 million shekels) and the Transportation Ministry (312 million) and the Education Ministry (177 million).

Other savings are coming by deferring pay raises for civil servants, an initiative Histadrut Chairman Avi Nissenkorn has already agreed to. The budget calls for putting off three pay hikes slated for January, June and December 2018 each by six months, a move that will cut wage costs for the government in 2018 by 1 billion shekels.

Some ministries will be getting a lot more from dedicated increases. The defense budget is slated to grow 9.5% next year, or 5.3 billion shekels; the health budget by 9%, or 2.6 billion, transport by 14.5%, or 2.3 billion; and housing by 20% addition, or 1.5 billion. Education is due for a 2%, or 2 billion-shekel, increase.

The treasury also aims to pick up some money from places like the Airports Authority and Jewish National Fund. That includes 1.2 billion shekels annually over 2017 and 2018 it is seeking from accumulated profits at the Airports Authority, although it is still in negotiations over a final figure. The JNF has agreed to transfer 1 billion shekels annually over the next two years.

Other ways of boosting income will come from tax increases. The most important and controversial is one that will tax owners of three or more residential properties. It is designed mainly to encourage housing investors to exit the market but it will also bring in some 800 million shekels in badly needed revenue.

The Finance Ministry has answered critics, who say the tax on homes will end up being passed on to tenants, by pointing to figures that show only 60,000 of the 650,000 rental units nationwide will be affected by the new tax.

Another tax hike is aimed at pensioners earning three times the average wage nationally, or about 30,000 shekels a month, will be put into higher tax brackets, which will generate another 700 million shekels in tax revenues. Revising how kibbutz members pay tax is forecast to generate 500 million and taxes on gambling a further 200 million.

After promising he would cut income taxes for individuals and corporations to the tune of 2 billion shekels, Finance Minister Moshe Kahlon has to squeeze savings and find other forms of revenue due to lost revenues over the two years. The 2017-18 budget calls for income taxes to fall for people earning 20,000 shekels a month, with those earning more paying higher rates, starting January 1. For corporations, the rate will drop by one percent next year and another one percent in 2018 when it will fall to 23%.

The bottom line is that with all the savings and tax adjustments, the treasury expects the government to run a deficit equal to 2.9% of gross domestic product in each of the next two years. That’s more than the 2.7% the law currently allows, but by increasing the deficit by 0.2 percentage point, the Finance Ministry gets 5 billion shekels more to spend in 2017 and 8 billion in 2018.

The downside is that a deficit of 2.9% means Israel will see its already relatively high debt-to-GDP ratio rise over the next two years, upsetting a long-term strategy of bringing it down. The budget calls for more fiscal restraint, but only in 2019, with the aim of bringing the deficit down to just 1.5% of GDP by 2023.