Finance Ministry proposes budget cuts to counter burgeoning deficit
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Finance Ministry proposes budget cuts to counter burgeoning deficit

Finance minister to also raise some taxes, despite looming national elections; cuts come on top of billion shekel reduction to defense, education budgets

Finance Minister Moshe Kahlon in the Knesset, Israel's parliament, June 12, 2019. (Yonatan Sindel/Flash90)
Finance Minister Moshe Kahlon in the Knesset, Israel's parliament, June 12, 2019. (Yonatan Sindel/Flash90)

The Finance Ministry headed by MK Moshe Kahlon on Thursday proposed budget cuts to help reduce the soaring deficit, an unpopular move before the upcoming elections in September.

The requested NIS 3.25 billion ($900 million) cut is in addition to a previously announced reduction of NIS 1.15 billion to the defense and education budgets.

The cut is expected to be passed when it is presented for discussion at the cabinet on Sunday. Alongside the cuts, to generate revenue, the ministry is proposing to raise taxes on hybrid cars, a new tax on industrial fuels expected to generate NIS 450 million, and a transfer of NIS 150 million from the national lottery Mifal Hapayis, which Treasury officials say is the amount the lottery board overspent.

In January the treasury warned of slower economic growth in 2019 that would result in less tax revenue, resulting in a projected budget shortfall of around NIS 10 billion ($2.7 billion). The deficit increase was exacerbated by increased government expenditure as ministers caved to demands for higher wages in the public sector, including the police, or spent money on projects to make housing cheaper for consumers.

A general view of the Ministry of Finance in Jerusalem, November 26, 2006. (Flash90)

In early 2019 Finance Minister Kahlon was reluctant to announce budget cuts or tax increases before the April 9 election.

Economists had warned the new government would have to set out long-term policies to curb the shekel’s rise, boost education and infrastructure, and trim bureaucracy. But Kahlon’s hand now appears to have been forced after no government was formed and with Israelis due back at the polls again in September,

It was already known last December that tax increases and government spending cuts were needed because overspending had exceeded the predicted budget deficit of 3.5% of GDP, instead of the 2.9% goal.

A flagship housing program promoted by Kahlon is one of the key reasons for the rise in government debt, economists have said.

In its 2018 report on Israel’s economy, the Organization for Economic Cooperation and Development (OECD) reported that the government’s “planned budget deficits are high.”

“Steady fiscal consolidation will be needed to reduce public debt relative to GDP,” the OECD warned.

In November Kahlon shrugged off concerns about the growing deficit, saying he wouldn’t raise taxes to help balance the books.

The deficit — the difference between a government’s income and how much it spends — is also expected to rise in 2019, in breach of a government target of 2.9% of GDP. The deficit for January and February 2019 came in at NIS 5.6 billion ($1.545 billion), or 3.5%, on an annualized basis, the Finance Ministry said in March. If a budget deficit is too high, it gives the government no room to deal with a potential economic slowdown through even greater spending, economists and analysts have warned.

In 2018 the budget deficit came in almost miraculously within the target set by the government, exactly at 2.9% of GDP, according to Finance Ministry data. Most analysts had predicted the deficit in 2018 would also breach the target, based on preliminary data that showed there would be a shortfall of income.

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