Israel’s Planned Tax Cuts Could Boost Growth. And Deficit, Too

  • Economists see better use of funds, say inequality to grow
  • Finance Minister plans ‘billions of shekels’ in tax cuts

Israeli Finance Minister Moshe Kahlon’s plan to stimulate growth by cutting taxes came under fire from critics who warned it risks widening the deficit without addressing more pressing needs.

“In my mind, there are two key engines that encourage economic growth -- investments and tax cuts,” Kahlon said Monday, pledging to pare billions of shekels on the assumption tax receipts will continue to be higher than forecast. “We promised to continue to make life easier for citizens, and we are planning a series of steps that will reduce their tax burden.”

Kahlon, who lowered value-added and corporate taxes last year, gave no details about his next round of proposed cuts. Israeli media reported that income and corporate taxes would be reduced.

The finance minister’s plan puts him at odds with the Bank of Israel, which favors a bigger tax base to improve backward infrastructure and deficits in education that crimp productivity. The bank also advocates paying down Israel’s external debt, which has declined for six straight years, falling to 64.6 percent of gross domestic product in 2015.

Spending Cuts

Economist Omer Moav lauded the prospect of lower taxes but said Kahlon must also cut spending.

“Countless studies show that tax cuts, and a smaller government, are good for economic growth and so to a certain extent, he will see some of those cuts come back to state coffers via more growth,” said Moav, an economics professor at the University of Warwick in the U.K. However, “without cutting expenses he’s just basically increasing the deficit,” he said.

The government has set a gap ceiling of 2.9 percent of GDP for 2016.

Israeli economic growth slowed to 1.3 percent in the first quarter as exports plunged. Still, with housing prices rising and consumption robust, tax receipts have exceeded forecasts. In the first six months of the year, receipts were 4 billion shekels ($1.04 billion) higher than projected.

The proposed tax reduction is liable to deepen Israel’s income inequity, which ranks among the highest in the OECD, because low-income earners pay few if any taxes, according to the chief economist of Bank Leumi Le-Israel Ltd., Gil Bufman. Kahlon would better serve the economy with tax incentives that spur investment, such as letting machinery and equipment be amortized more quickly, he said.

“If you fine-tune the tax cuts and do them in a way to address very specific activities where the economy is performing poorly, you get a major benefit,” said Bufman. “I’m not happy with widespread tax cuts which are not pinpointed on the problem at hand.”

Kahlon, who runs the second-largest party in parliament, may benefit from the politically popular move. His party, Kulanu, has lost ground in public opinion polls and he has not yet delivered on his promise to lower housing prices.

While the details of the plan are vague and there may be an economic basis to lowering taxes, “I think it has to do with trying to increase his popularity and turning to the base instincts of people who don’t like to pay taxes,” said Abraham Diskin, a political scientist who has taught at the Hebrew University of Jerusalem.

The Bank of Israel and the Finance Ministry declined to comment.

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