Bank of Israel Warns Lapid’s Tax Turnabout Will Impact on Deficit

YERUSHALAYIM -

The Bank of Israel has warned that Finance Minister Yair Lapid’s turnabout, calling off a planned income tax increase, will pose “tough challenges” to making deficit targets for 2015 and beyond, The Jerusalem Post reported on Tuesday.

“The budgetary steps which were decided upon toughen the challenge of meeting the deficit target of 2.5 percent of GDP, which was set for 2015. Meeting this target will require extensive policy measures, since the cost of the programs which the government decided on is already greater than the expenditure limit which will allow meeting the target,” the Bank said in a statement.

Lapid on Monday sought to appease financial experts with a promise to cut spending by NIS 3 billion in 2014 to avoid breaching that year’s 3% deficit target.

He said he was in talks with Bank of Israel Governor Karnit Flug and the prime minister’s top economic adviser Eugene Kandel to lower the spending rule, which limits how much government spending can rise from year to year (regardless of the deficit). The BOI characterized the decision to adjust the expenditure ceiling as “appropriate.”

But Lapid continued to be the target of scathing criticism for his change of course.

United Torah Judaism MK Rabbi Moshe Gafni commenting caustically on the consequences of Lapid’s lack of preparation for the position of Finance Minister: “When I served as chairman of the Knesset Finance Committee, they also tried to intimidate me with inflated data about the deficit, and claimed there was no choice but to impose higher taxes on the middle class and the poor. But we didn’t let this happen, and instead transferred some of the burden on stronger segments of the economy.

“Lapid fell into this trap right away, which impelled him to levy taxes on the weaker sectors, and now he’s backtracking.”

Rabbi Gafni went on to say that there was no justification for the tax hikes in the first place, and that the deficit was not as bad as it had been portrayed.

The damage to Lapid’s reputation may prove hard to repair. “It seems that the finance minister changes policy direction in accordance with the public mood and his personal PR calculations,” MK Rabbi Yaakov Litzman (UTJ) said. “He is the laughing stock of the Knesset and we must not cooperate with him.”

Ofer Klein, head of the Economic Research Division of Harel Insurance and Finance, suggested a bright spot. He predicted that while cancellation of income tax increases made deficit targets harder to achieve, it would at least spur economic growth through private consumption. That might help the Finance Minister raise Israel’s growth rate to around 5% from its 2013 projected level of 3.6%.