Deficit is double the state’s projection, despite tax hikes

The national budget deficit in 2012 was double the projected two percent of Israel’s gross domestic product (GDP), despite tax increases enacted earlier in the year.

The ministry aimed for a 2012 budget deficit of approximately 2%, but higher spending and lower tax revenues than expected resulted in a 4.2% margin between government income and spending, a Finance Ministry report released on Sunday revealed.

The adjustments necessary to balance the 2013 budget are projected to be as high as NIS 20 billion (over $5 billion), Rafael Gozlan, the chief economist at the IBI investment house, told Yedioth Ahronoth. He posited that should an ultra-Orthodox and right-wing government be formed after next week’s elections, it would likely raise value added tax for the second time in a year.

According to figures released by the Finance Ministry, tax revenues in 2012 totaled approximately NIS 218 billion, falling approximately NIS 14 billion short of expectations. Including other shortfalls, the total gap between government spending and income resulted in NIS 39 billion instead of NIS 18 billion.

Prime Minister Benjamin Netanyahu said in response that the publication did not come as a surprise and that “the deficit will not have significant effect on the lives of Israelis.”

Finance Minister Yuval Steinitz said on Israel Radio that the government in July announced that the deficit would be far higher than the projection made a year ago, and therefore increased certain taxes to minimize the disparity. He, too, said that the reported deficit did not come as a surprise to anyone and dismissed claims that the government had lost control over the budget.

He said the government had no intention of increasing the VAT as a result of the report.

Netanyahu has touted his government’s stalwart economic policies and the country’s success at weathering the global recession, saying a vote for the Likud party in the upcoming elections is a vote for continued economic strength. His government’s inability to find the necessary consensus to pass a 2013 budget in October prompted the dissolution of the Knesset, which sent the country to national elections.

Netanyahu’s political opponents were quick to attack the prime minister over the deficit. Newcomer Yair Lapid’s Yesh Atid party said the deficit indicated that “the economic policy of the prime minister and finance minister is collapsing before their eyes.”

“The prime minister failed in thinking that raising taxes on the middle class will solve the problem of the deficit. In practice, levying taxes on the middle class and small businesses only strangles the Israeli economy,” it said.

The Meretz party called the government fiscally irresponsible and charged that the Netanyahu administration “unnecessarily poured tens of billions [of shekels] into the inflated defense budget,” echoing statements made by former prime minister Ehud Olmert this weekend, and on favors to right-wing and ultra-Orthodox political allies.

Hatnua leader Tzipi Livni blamed the political stalemate for the “huge deficit and economic decline,” adding that Israel’s international isolation hurt its economy.