To rein in deficit, taxes may need to rise, spending to drop – budget chief

Central Bureau of Statistics releases preliminary estimates for GDP growth of 3.2% in 2018, lower than expected; 2017 saw a growth of 3.5%

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Finance Ministry budgets director Shaul Meridor attends a press conference at the Finance Ministry in Jerusalem on December 11, 2017. (Yonatan Sindel/Flash90)
Finance Ministry budgets director Shaul Meridor attends a press conference at the Finance Ministry in Jerusalem on December 11, 2017. (Yonatan Sindel/Flash90)

Israel may need to raise taxes or cut government spending to stay within its deficit target, the budget director at the Finance Ministry said at a conference in Tel Aviv on Monday.

“We are in a situation that is less good than we originally thought,” Shaul Meridor, the head of the Finance Ministry’s budget department, said at a business conference organized by the Calcalist financial news website.

Growth forecasts globally are declining, Meridor said, and the Central Bureau of Statistics has also updated its forecasts for growth. On Monday the Israeli bureau issued preliminary data indicating that economic growth in 2018 would be 3.2%, lower than the 3.5% growth posted in 2017 and the 4% growth in 2016. The growth pace for 2018 would be the slowest since 2015. The slowdown was mainly attributed to a smaller rise in exports this year, even though consumer spending advanced.

The Bank of Israel had projected a growth rate of 3.7% for 2018 and 3.6% in 2019.

Meridor said it was important to keep in mind that even as forecasts are lower, the Israeli “economy is in a very strong situation. It will be less good than what we thought but still in a good situation.”

Prime Minister Benjamin Netanyahu (left) and Finance Minister Moshe Kahlon in the Knesset on March 13, 2018. (Hadas Parush/Flash90)

He said the budget department at the ministry will do its utmost to preserve the framework of Israel’s budget deficit.

“Our ability to give a lot of money in the coming years to very many subjects and populations” depends on Israel’s ability “to stay within a fixed framework,” he said.

“This is very important. We must and will safeguard this framework at any cost and to do this, if the results will be indeed less good, we will either raise taxes or cut costs; one of these two things must happen.”

He said that even if the budget deficit figures for October and November came in at around 3.5%, they do not reflect the situation as it actually is and he hopes the deficit for 2018 will come in closer to its target of 2.9%.

“We will be very close, I’m not sure yet where it will be,” he said.

Meridor’s comments come as the country faces new parliamentary elections on April 9.

The budget deficit in the 12 months to October 2018 rose to 3.6 percent of gross domestic, much above a target of 2.9 percent. Data in November also showed tax income in the first 10 months of 2018 had fallen from the same period a year earlier, despite stronger economic growth.

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

Supervisor of Banks Hedva Ber speaking at the Calcalist conference on December 31, 2018 (Screenshot)

At the Calcalist conference, Hedva Ber, the Supervisor of Banks at the Bank of Israel, said that her department had finalized its checks on Warburg Pincus LLC and will recommend that the central bank allow the sale of the credit card subsidiary of Israel’s Bank Leumi Le-Israel Ltd. to the US private equity firm.

“We have already the finished review of Warburg Pincus and they are fit and proper to buy Leumi Card from the banking supervisor’s standpoint,” Ber said. “We are going to recommend to the Bank of Israel governor to give them a license. The divestment is going ahead.”

The US firm agreed in July to acquire the credit card business from Leumi, which holds an 80% stake, and property developer Azrieli Group, which holds a 20% stake, for NIS 2.5 billion ($666 million).

The newly separated unit will be able to market insurance products, Ber said, in a bid to give it an edge over other credit card firms in the market and help ensure its continued success.

The sale of Leumi Card is part of a push by the government to increase competition in the nation’s financial and banking sector. Bank Leumi and its rival Bank Hapoalim Ltd. have been forced to sell their credit card units in accordance with the Law for Increasing Competition and Reducing Concentration in Israel’s Banking Market. Bank Hapoalim, which owns Isracard Ltd., the nation’s largest credit card business, has until next year to sell the company.

Ber also said that she hopes that 2019 will see the setting up of a new digital bank as part of the central bank’s bid to inject competition in a sector that is dominated by Leumi and Hapoalim banks.

“There are a number of bodies that are interested in the possibility of setting up a new bank,” she said, though they have not yet submitted a formal offer.

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