Flug Talks Down Tax Cut

Governor of the Bank of Israel Karnit Flug threw cold water on Finance Minister Moshe Kahlon’s plans for a tax cut, saying that state revenues are insufficient to justify it, Globes reported.

“There is a broad consensus among the professional staff, including in the Ministry of Finance, that taxes should not be cut, given the small surplus in state revenue,” Flug told foreign reporters at a press conference on Wednesday. Flug explained that tax revenues in the first quarter were only slightly higher than the projections in the budget.

Referring to government spending, Flug said, “The structural deficit in Israel is definitely high, and I would not want to see it increase any further.” Flug said further that the Israeli economy was at the peak of the current business cycle, and according to an anti-cycle fiscal policy, this was the time to cut the deficit.

Kahlon said before Pesach that he wanted to cut taxes, though he did not have any details to offer at the time.

Since then, he was slated to hold discussions on the matter with Prime Minister Netanyahu, the National Economic Council headed by Prof. Avi Simhon, and Finance Ministry officials.

Kahlon has qualified his intention by saying that the final decision on cuts will be made with reference to the economic data. Flug’s comments on Wednesday suggested that the data will force the minister to scale back on whatever he had in mind.

The structural deficit is calculated as government spending minus revenues, excluding one-time revenue. According to the latest Bank of Israel report, the structural deficit rose by over 50 percent to 3.5 percent of GDP in 2017, compared with 2.1 percent in 2016. 80 percent of the increase in the structural deficit is attributable to an increase in government spending, and the remaining 20% to a decrease in state revenue.