2017 budget deficit target appears overly optimistic

ISRAEL - In Brief 12 Sep 2016 by Jonathan Katz

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2017 revenue target rather challenging The big question lies in next year's budget which is fairly expansionary on the spending side, but aims at maintaining the 2.9% GDP deficit target. Much will depend on the level of economic activity, but without the "one time" factors witnessed this year the deficit could surprise on the upside. The 2017 tax revenue target in the budget framework assumes a real tax growth of 3.6% (above actual 2016). Several factors could surprise on the downside: The MOF assumes imports of consumer goods will increase by 2.5% (following 7.7% in 2016). Imports of consumer goods could likely contract next year, in light of the surge of imported vehicles this year on the back of higher taxation ("green tax") to be imposed as of 1.1.17. This pattern of surging vehicle imports on the eve of higher taxation (and then contraction) occurred in 2014 as well (see graph). A 3% decline in consumer imports will result push tax revenues below target by 5bn.The 2017 budget assumes stable activity and demand for housing in 2017. In light of higher taxation on investors (MOF wants to tax owners of 3 homes or more), demand for housing could actually decline. If new housing sales decline by 10%, revenues will be reduced by 3bn. Already, new home sales are down 18% y-o-y in July on the back of more expensive financing costs (mortgage prices up).One budget assumption does seem somewhat conservative. Real wages are expected to increase by 1.4% in 2017. Yet looking at the current tight labour market and minimum wage hikes, wages could increase easily by 3% in real terms. Already private sector wages are expanding at a clip of 4% SAAR in Q2 (nominal). Stronger wage grow...