Israel: Tax cuts untimely
Positive growth in the second quarter of 2009, albeit slight, has marked the start of recovery. Expectation of indirect tax increases prompted a burst in car sales. Also, government spending increased rapidly, reflecting a pick-up from previously constrained expenditure. Growth rates of non-durable consumption, investment and exports all turned positive. Economic activity is expected to pick up throughout the projection period. Underlying inflationary pressures are likely to remain muted, but the risks are on the upside.
The latest government budget limited the rise in the deficit but relied excessively on short-term measures to achieve deficit and spending goals, and scheduled cuts in corporate and personal taxation for 2010 are untimely. The Bank of Israel has moved early towards a less expansionary stance, but its continued foreign-exchange interventions risk bringing additional inflationary pressures and damaging policy credibility and coherence.
©OECD Observer 2010