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Best Budget Fix for Israel's Finance Minister? Invest, Don't Tax

Economy Aug 20, 2019 05:37PM ET
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© Reuters. Best Budget Fix for Israel's Finance Minister? Invest, Don't Tax

(Bloomberg) -- Spending to grow its economy may be Israel’s solution to budgetary woes, according to Finance Minister Moshe Kahlon.

Speaking in an interview, Kahlon outlined measures to counter a widening deficit that could include privatization of major Israeli companies, building roads, and job training for Arabs and religious Jews who have traditionally had less of a role in the workforce.

As the fallout of trade disputes spreads, stimulus is increasingly on the agenda for global policy makers bracing for the threat of recession. Voicing frustration that snap re-elections have handcuffed him from taking steps already this year, Kahlon said the measures will improve productivity, increase government revenue, raise living standards and consumer spending.

“We don’t need to raise taxes -- we need to take actions to grow the economy,” Kahlon said. “We know what we want to do, but first we need to be elected.”

Prime Minister Benjamin Netanyahu failed to form a governing coalition after elections in April and now faces a new poll that looks extremely tight.

Policy Divide

Kahlon, 58, has led the Finance Ministry since 2015, taking the job after delivering dramatic reforms in Israel’s communications industry in his previous cabinet post. He’s embraced policies to help close social gaps, and may now be best known for his program of stabilizing housing prices.

The opposition to tax increases leaves Kahlon at odds with the Bank of Israel, which has said that such hikes could be necessary to close a deficit that reached 3.8% of gross domestic product in July, near the highest since at least 2014 and well above this year’s 2.9% target.

Rating companies have so far said they aren’t concerned, expecting the gap will narrow once the country’s mid-September vote leads to a new government. In May, the International Monetary Fund called on Israel to bring the deficit to 2.5% for 2020 to put an end to increases in public debt.

Bank of Israel Governor Amir Yaron has also warned officials not to be complacent about the deficit, despite the fact that markets have been unfazed thus far.

“Current policies imply further deficit increases in coming years,” the IMF said after a staff visit to Israel. “Leaving debt on a rising path will constrain Israel’s ability to use fiscal policy to cushion shocks to the economy.”

Investing in badly-needed infrastructure upgrades is an economic priority for Israel. The focus on improving productivity is also key since the country is ranked below average by the Organization for Economic Cooperation and Development.

Infrastructure, Productivity

The central bank in its latest annual report said maximum improvements in infrastructure could boost the level of GDP by 6%. Its research published this week recommended adding education hours for minority communities such as the Arabs and ultra-Orthodox and funneling more investment into public transportation.

The Bank of Israel’s research department has forecast that economic growth would slow and converge toward its potential of around 3% over the coming two years. A worsening outlook for exports is now a challenge for an economy that’s relied on trade for about a third of GDP.

But Kahlon was upbeat that his plan -- focused on domestic change including the completion of the privatization of the Postal Service and the Haifa port -- would work in returning to long-term debt trends.

“We need to set our priorities, spread out the investment, and invest as the economy grows,” Kahlon said.

Best Budget Fix for Israel's Finance Minister? Invest, Don't Tax

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