Fiscal deficit swells to 1% as tax income drops and government expenditure grows

Figures show government spending has increased 6.8% since the start of the year, while state income from taxes fell 4.3% year-on-year, led by sharp drop in real estate taxation

By Sharon Wrobel

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8 August 2023, 10:07 pm

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Sharon Wrobel is a tech reporter for The Times of Israel

Finance Minister Bezalel Smotrich leads a Knesset faction meeting of his far-right Religious Zionism party, July 10, 2023. (Chaim Goldberg/Flash90)

Israel’s fiscal deficit widened to 1 percent of GDP, or NIS 18.3 billion ($4.9 billion), in July over the prior 12 months, as state revenue from taxes continued to slide, led by a slump in real estate and income tax collection, while government spending rose, preliminary figures released by the Finance Ministry on Tuesday show.

In recent months, economists have been warning that the country will find it challenging to meet its fiscal deficit target for this year of around 1.1% amid expectations for a continued decline in income from taxes as the global economy is facing a slowdown and higher borrowing costs are hampering the pace of real estate deals. Adding to this is concern that uncertainty over the planned judicial overhaul will shun foreign investment and hamper local economic activity.

The government in 2022 posted the first budget surplus in 35 years of 0.6% of GDP as state revenues rose 4.8% to NIS 468.5 billion ($126 billion), benefiting from an exceptionally high increase in the collection of tax income.

The July figures showed that state revenues amounted to NIS 39.2 billion ($10.5 billion) down from NIS 32.7 billion ($8.8 billion) in June, marking a decline of 20% month over month. Since the start of the year, state revenues dropped 4.1% and state income from taxes fell 4.3% year-over-year.

Meanwhile, in the first seven months of 2023, government expenditure soared by more than NIS 16 billion ($4.3 billion), or 6.8% year-on-year to NIS 263.4 billion ($71 billion). State expenditure in July stood at NIS 39.7 billion ($10.7 billion) in July versus NIS 36 billion ($9.7 billion) during the same month last year.

Collection from state tax income in July 2023 totaled NIS 37.4 billion ($10 billion), down 3.6% in real terms compared with the corresponding month last year, according to data published by the Israel Tax Authority. Since the start of the year, tax income dropped by 7% year-on-year. Direct taxes fell by 4.3% in July versus the same month in 2022 and by 9.1% in the first seven months of this year compared with the corresponding period last year.

Illustrative: Construction of new residential buildings on Allenby Street in Tel Aviv, May 21, 2023. (Miriam Alster/Flash90)

The decline in direct tax revenues derived mainly from a sharp decline in real estate tax revenues, a decline in income taxes and an increase in tax refunds, the Tax Authority said. Net income from real estate taxation almost halved to NIS 1.2 billion ($322 million) in July from the NIS 2.2 billion ($591 million) collected during the same month in 2022. The figure marked the lowest level since the start of 2021.

The collection from purchase taxes plunged by 49% in July year-on-year and income from property betterment taxes fell by 48% year-on-year.

On an accumulative basis, income from real estate taxes has dropped by 43% since the start of the year.

Israel posted deficits of 4.4% of GDP in 2021 and 11.3% in 2020 as the government introduced a NIS 196.3 billion ($53 billion) multi-year economic aid spending plan to help the economy deal with the coronavirus pandemic.