Flug urges infrastructure spending, not tax cuts

Bank of Israel Governor Karnit Flug on Wednesday urged the government to use excess tax revenues to invest in infrastructure and education rather than cut taxes further.

Israel’s tax revenues have been higher than expected over the past year and stand to get a NIS 4 billion boost from capital-gains tax if Intel’s planned $15.3b. takeover of self-driving car-tech firm Mobileye goes through this year.

Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon have said they want to cut taxes further if revenues keep rising. But Flug said investment in jobs, education and infrastructure were more important for economic growth, and current levels of investment “indicate a troubling picture.”

“It is clear that we don’t want to lower taxes permanently because of increased collection from onetime factors, like the acquisition of Mobileye,” she told reporters, noting Israel’s level of taxation is relatively low.

Kahlon cut corporate tax by one percentage point to 24% at the start of 2017, and the rate will drop to 23% at the start of 2018. Income taxes were also reduced.

“There is a great preference for investment in infrastructure and education,” Flug said.

Israel’s investment in infrastructure is low relative to other countries and “negatively impacts on the economy’s growth potential,” she said.

At the same time, Flug said government spending per student is only about 75% of the OECD average and has led to Israelis performing poorly in tests of basic skills such as literacy, math, writing and problem solving in a digital environment.

Israel’s economy grew 4% in 2016, higher than in most advanced economies, but is expected to slow this year. (Reuters)