Budget Blues / Warning: Tax Hikes Ahead

The moment is approaching when top Finance Ministry officials and the commissioner of the Tax Authority reach the conclusion. Namely, that they have no choice but to recommend painful tax increases.

Prime Minister-designate Benjamin Netanyahu, his economic advisers and of course all the current treasury chiefs subscribe to the Laurel and Hardy school of economics - they support reducing the "fat" public sector and beefing up the "thin" business sector. One of the main catalysts for this process is reducing the tax burden, and that means cutting income and corporate taxes as well as VAT.

But reality is about to spoil the party. The decline in tax revenues in the third quarter last year turned into a bona fide tailspin in the fourth quarter and the first two months of 2009. Without tax revenues Netanyahu's government won't have the money it needs for spending.

Tax income in February was NIS 13.5 billion - the same as in February 2005, representing a four-year rollback. Even scarier is the fact that this was not just a one-month blip. For the past 14 months, from January 2008, tax revenues have been lower than in the same month the previous year. The worry is that the backward slide will continue.

In the past three months (December to February), the decline in tax collection has approached 20% in comparison to the same period a year earlier, to total just NIS 40.4 billion. Annualized, that comes out to NIS 161.7 billion - again, hello 2005.

The government's tax-revenue forecast for 2009 is NIS 202.7 billion. The gap between that and the actual amounts being collected in the past three months is exactly NIS 41 billion. The implication is that the Netanyahu government in the making will be short NIS 41 billion in meeting the 2009 budget approved by Prime Minister Ehud Olmert's government seven months ago.

NIS 41 billion is an enormous amount of money.

The 2009 state budget assumes a NIS 7 billion deficit. To that, plus the NIS 41 billion deficit described above, we must add at least NIS 10 billion in allocations on top of the existing budget (to pay for Operation Cast Lead, economic stimulus projects and payments to the coalition partners). The bottom line is that the future government is starting off with a NIS 58 billion hole - 8% of GDP - to implement the 2009 state budget as passed by its predecessor.

Where, o where will the money come from? Presumably from bond issues and loans in Israel and abroad, from very painful cuts on the spending side and from magnifying the tax burden. As it appears now, 2009 and 2010 are shaping up to be difficult years.