​Fiscal policy turns more expansionary

ISRAEL - Report 11 Aug 2016 by Jonathan Katz

The fiscal policy of the present government (and especially that of the MOF Minister Kachlon) has been characterized by fairly high rapid growth in government expenditure as well as tax reductions. This policy commenced in the 2016 budget (as the 2015 budget was only approved in November 2015) and is expected to continue in the proposed 2017-2018 two-year framework. Despite this more expansionary policy, the fiscal deficit this year is expected to undershoot the target as a result of a surge in tax revenues (nearly 1% GDP above target), mostly due to transitory factors such as massive vehicle imports (heavily taxed). This policy is feasible as long as revenues surprise on the upside, but makes Israel vulnerable to an economic downturn as tax revenues contract. In addition, the constant upward revision of the fiscal deficit target in recent years is certainly not supportive of fiscal credibility, although Israel has managed to maintain a manageable government debt/GDP.

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