Robust fiscal posture in 1H16

ISRAEL - In Brief 08 Jul 2016 by Jonathan Katz

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Israel has maintained strong fiscal credibility so far this year. The fiscal deficit in the first six months reached 3.4bn ILS, compared to 3.8n this time last year. The 12-month rolling deficit reached 2.1% of GDP, similar to last month, but down from April's 2.2%. We note that the fiscal target for this year was pushed to 2.9% GDP, following a deficit of 2.15% in 2015. Tax revenues are up 8% y-o-y in the first six months of the year, in real terms. Tax revenues have surprised on the upside, already exceeding the original fiscal forecast by 4bn ILS. Tax revenues in June alone surpassed the fiscal target by 1.1bn.Strong tax revenues are the result of a surge in purchases of new vehicles (heavily taxed) by 40% y-o-y in 2Q16. In addition, housing activity remains elevated, with sharply higher new home sales, which are also taxed (VAT, purchase tax).Corporate taxes are up substantially, in part due to capital gains tax revenues from the sale of Israeli start-up companies. The MOF currently expects total tax revenues to reach 284-288bn ILS, above the fiscal assumption of 277.9bn. On the expenditure side, spending has lagged the allowed allocated budget. Non-defense spending is up 10.5% y-o-y in 1H16 (lower than the 11.4% budget increase), while defense spending is up 1.1% y-o-y, actually surpassing the budget contraction of 3.7% (increased defense spending was approved earlier this year by the government). The BOI expects the actual fiscal deficit to reach 2.6% GDP this year, but after a lower-than-expected deficit in 1H16, this forecast appears overly pessimistic. Implications: Clearly strong tax revenues are supported by robust economic activity in general and private co...