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I-Biz Israel Business Information Services Dec 2009
I-Biz Israel Business Information Services Dec 2009

While a fairly wide range of economic indicators have recently been showing initial signs of recovery from the recession (mild positive GDP growth in the 2nd and 3rd quarters of 2009, a marginal decline in the unemployment rate in the 3rd quarter), the fiscal situation has up to now not shown parallel signs of improvement until November data on tax revenues were published early in December.

Tax revenue data were one of the earliest indicators of the approaching recession: total revenues showed a decline (compared to the previous year) as early as January 2008). But then in November 2009, there was an increase in tax revenues for the first time since early 2008 (see graph: the graph shows data only from January 2009 but tax revenues declined in every month of 2008).

The main increase in November 2009 was in indirect taxes (which reflect demand): the graph shows that there was a similar sharp increase in these taxes. But perhaps more meaningful was the very limited November increase in direct taxes (which reflect economic activity) since as with total tax revenues this is the first increase since December 2007.

The tax increase in November should not be taken out of proportion. The extent of the increase was 12.3% compared to November 2008. But tax revenues in November 2008 were 11.3% lower than in November 2007. The outcome of these comparisons is that tax revenues in November 2009 were no higher than in November two years earlier. So despite the significance of the November 2009 increase, it is clear that there is still a way to go until tax revenues revert to a growth trend which will reflect clear growth in the economy.

This could take a long time: the budget deficit estimate for 2009 is still 6%, double the deficit considered reasonable by international standards: the estimated deficit for 2010 is 4% of GDP. These above standard deficits are principally the result of the expected continuing weak performance of tax revenues.

The government, on the other hand, does not seem too perturbed by these deficit estimates, which would normally lead it to continue restraining its expenditure. According to the main headline in The Marker on 14 December, one of Israel's two main financial newspapers, the government is that convinced that the recession is over that it has already begun increasing employment in the government sector and also raising wages in this sector. At the same time, the business sector is far less convinced that the recession is completely over.

The government obviously considers that the November increase in tax revenues will strengthen in the months ahead, but this still remains to be seen.    

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