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PM expands budget deficit instead of raising taxes

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Prime Minister Binyamin Netanyahu overruled Finance Ministry demands Tuesday, deciding to double next year’s budget deficit ceiling to 3 percent of gross domestic product instead of implementing new tax hikes.
The government initially set the 2013 deficit target at 1.5% when it published multi-year projections two years ago. Senior Treasury officials had reportedly been pushing for an increase to 2.5% accompanied by tax hikes, but the prime minister announced the deficit would rise to 3% – or almost NIS 30 billion. Netanyahu and Finance Minister Yuval Steinitz also agreed to set new long-term deficit targets – lowering it to 2% by 2016 and 1.5% by 2019 – and to maintain their original goal of lowering debt-to-GDP ratio to around 60% by 2020.
Netanyahu’s decision followed weeks of speculation that the government would address expected tax revenue shortfalls by implementing large-scale spending cuts and increasing the value added tax (from 16% to 17%) and corporate tax. In June, the Treasury released data showing a NIS 18.4 billion budget deficit since the start of 2012, which it blamed mainly on a NIS 11.3 billion tax collection shortfall. A further shortfall is expected next year.
Steinitz said the new 3% deficit target was still lower than that of most Western countries, adding that he would make an effort over the coming weeks to submit steps to the government in order to meet the target. Netanyahu promised to maintain “important national programs” such as blocking the entry of illegal African migrants and providing free education to young children.
In response to Tuesday’s announcement, Opposition leader Shelly Yechimovich called Netanyahu’s decision a move “in the right direction” but warned that it was not enough. She alleged that Netanyahu was still planning to implement large-scale spending cuts, adding that such a move would harm the lower and middle classes and increase the cost of living.
Yechimovich said she had received documents revealing that Netanyahu plans to cut municipal authority budget allocations by 7-10%, or NIS 1.3 billion. The cuts will apply to most major cities, including Tel Aviv-Jaffa, Jerusalem, Haifa, Beersheba, Ashdod, Ashkelon and Hadera, she said, causing “fatal damage” to social and educational services.
“This cut means that most households – while already collapsing under the burden – will be forced to pay more from their own pockets for services that they should be provided by law and which are funded by taxes which they already pay,” Yechimovich said. “Netanyahu is again giving with one hand and taking from the other – by drafting a policy for social ruin that is the exact opposite of social justice.”
Meretz Chairwoman Zehava Gal-On called Netanyahu’s announcement “spin for poor accounting,” saying that for years there has been no connection between “the unrealistic deficit targets” fixed by the Treasury and the actual deficit. In addition, she accused the PM of presenting the measure in a manner designed to hide the fact that inequality has expanded and social services have collapsed under his leadership.
“In every one of the last three years, the actual deficit has been higher than 3%, and therefore there is no news in the government’s decision to manufacture another high deficit forecast,” Gal-On said. “The real problem with this government’s fiscal policy is its restriction on raising expenditure, which leads ultimately to the disintegration of the public sector, to the erosion of teacher, doctor and social worker salaries…and to a series of measures which result from the Treasury’s paralyzing fear of dealing with the idea of an enlarged welfare state.”
Manufacturers Association President Zvi Oren welcomed the “brave decision” not to raise taxes, and called for the government to hold a round-table discussion with employer and worker representatives in order to ensure that job creation is taken into account in the budget.
Knesset Finance Committee Chairman Moshe Gafni (UTJ) informed the government Tuesday that committee members expect to receive access to all the economic data used by Treasury officials in formulating the budget. He said the data should be sent to MKs before the budget is brought for Knesset approval, in order to allow the committee to fulfil its supervisory role.
Meanwhile, former Bank of Israel deputy governor Zvi Eckstein will present a report outlining three alternative budgetary policies at the Israel Democracy Institute’s annual Caesarea Forum this Thursday. Eckstein compiled the report with a team of 11 representatives from government ministries, the central bank, academia, and business and student groups.
Policy A proposes maintaining existing fiscal policy and deficit targets (notwithstanding Netanyahu’s announcement), while altering expenditure and taxation rates where needed. The aim of this policy is to keep public expenditure at 43% of GDP, while causing a marked decrease in the debt-to-GDP ratio in 2014-18.
Policy B recommends maintaining spending restrictions without raising taxes, so that debt-to-GDP remains stable while the deficit expands to 3.6-3.7% in 2013-18.
Policy C advises in favor of expanding government expenditure to 45% by 2016 and simultaneously raising taxes while keeping the deficit target at existing levels.

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