Israel central bank chief warns government against tax cuts

Reuters

By Steven Scheer

JERUSALEM, Oct 29 (Reuters) - Bank of Israel Governor Karnit Flug warned Prime Minister Benjamin Netanyahu and his finance minister on Sunday that cutting taxes, as they intend to do, would jeopardise the country's ability to meet its future budget deficit targets.

Flug attended a weekly cabinet meeting and told ministers that in order to meet a budget deficit target of 2.5 percent of gross domestic product in 2019, the government will need 10 billion shekels ($2.8 billion) of spending cuts and more revenue, given state commitments and current income forecasts.

"Given the picture of the budget, it is clear that reducing taxes at this time -- which will lower the scope of taxes in coming years -- is inconsistent with meeting fiscal targets in the coming years," Flug said.

"If taxes are reduced there is a high probability they will have to be raised in 2019," she said, according to a statement from her office.

Israel has received a number of one-time tax benefits this year, most notably from Intel's$15.3 billion purchase of Mobileye.

"There is no reason to assume in advance there will again be positive surprises of a one-time nature in tax receipts," Flug said, pointing out that there have been revenue drops in the past due to global economic developments outside the control of Israeli policymakers.

Last week, Netanyahu told lawmakers at the start of parliament's winter session that he would work with Finance Minister Moshe Kahlon on lowering taxes to "make it easier for Israeli citizens, entrepreneurs and business owners", although he did not elaborate.

At the start of Sunday's cabinet meeting, Netanyahu said the government's major challenge was to manage the Israeli economy cautiously and responsibly.

"We will discuss this until the end of the year and we will need to decide how to deal with the accumulated reserves," he said, according to a statement.

Ministers were presented with macro data of the Israeli economy, and the Finance Ministry said the economy was strong, with full employment and very low unemployment, while those with lower incomes were also enjoying growth.

Israel's 2018 budget has already been approved. Kahlon has said he wants to submit the 2019 budget by next March.

Through September, Israel has posted a deficit of 1.9 percent of GDP this year, below a target of 2.9 percent for both 2017 and 2018.

($1 = 3.5317 shekels)

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