Improved deficit fuels pressure for Lapid to lower taxes

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Calls mounted Wednesday for Finance Minister Yair Lapid to lower taxes, following the finance ministry's revelation that the deficit is on track to come in well below its 4.65% of GDP target for the year.

"It turns out Lapid was not forced to raise your taxes," Opposition Leader Shelly Yacimovich said Wednesday at a Small and Medium Businesses conference in Airport City. "The new data published in light of the changes to the method of measuring [GDP] and economic growth confirm and reinforce our position, that from the start there was no need to impose such hard measures on the public."

Following a deficit explosion in 2012 that came in at over double the original target, the newly anointed Lapid cut proposed government spending and raised taxes for 2013 and 2014 in order to fill the budget hole and bring the deficit down to sustainable levels. Alongside the new method of calculating GDP, which added some NIS 66 billion to the estimated size of Israel's economy in 2013, a combination of higher-than-expected tax revenues and lower-than-expected spending brought the 12-month deficit in August down to 3.3% of GDP.

Yacimovich took the opportunity to blast Lapid for unpopular tax policies, which have included hikes on cigarettes and beer, a VAT increase, and an income tax increases set to go into effect in 2014. She also blasted him for not tackling corporate tax benefits, used to incentivize capital investments in the economy.

"Take the 4 billion shekels in tax benefits that the four biggest companies in the economy received in 2010, divide it into 4,000 small and medium businesses, a million shekels per business, and you've immediately got job creation, a real fight against concentration, growth, reduced gaps and entrepreneurship," she said.

Opposition politicians were not the only ones looking for changes, however; business groups also got in on the action.

The Federation of Israeli Chambers of Commerce, a business lobby, called on Lapid to undo the hike in the corporate tax rate, and bring it back down to 25% from 26.5%.

"For the first time in Israel's history the national output has reached NIS 1 trillion, and we must continue the growth momentum," FICC President Uriel Lynn said speaking at the same conference. "The improvement in the state budget should be seen as an opportunity to establish long-term policies that will give new momentum to the business sector, so I turn from this stage to the finance minister and suggest to him to take advantage of this opportunity now."

In Tel Aviv, the Israel Securities Authority released a committee report on improving liquidity in the stock market. Among its recommendations to Lapid: lower capital gains taxes to 15%.

"Reducing the tax rate will help the stock exchange companies raise capital in the stock market and may actually cause an increase in government tax revenues from capital gains," the report said.

But even ISA chairman Shmuel Hauser agreed that while the committee recommendations served their specific policy goals, it was up to the tax authority and finance ministry to weigh the broader implications of various tax increases. “The committee found that lowering capital gains taxes will increase liquidity and even help revenue,” he told The Jerusalem Post. “But it’s up to them to weigh the competing goals. We’re not the experts on that.”

Though a lower deficit is in many ways welcome for Lapid and the economy at large, balancing the political pressure to roll back tax increases may prove difficult when weighed against other economic realities.

In 2014 the deficit target will drop to 3% of GDP, and despite the impending income tax increase, many economists believe it will be difficult for the budget to stay in bounds.

"We believe that the deficit in the next budget year will be higher than the target, and will come out around 3.6 percent (compared to three percent according to the government target," analysts at Harel Finance wrote in a macroeconomic survey the start of the month, though the new GDP formula would bring that figure down somewhat.

"The meaning will be additional budget cuts (in our opinion, the ability to raise taxes has been completely exhausted), which will have a negative impact on economic activity."