The International Monetary Fund (IMF) has called on Israel to tighten fiscal policy faster than planned to keep inflation in check, suggesting that indirect taxes may need to be increased.

The IMF said in a report just published that the challenge for Israel is to sustain growth and low inflation while boosting medium-term prospects – in the context of continued global uncertainty, capital outflows from advanced countries, local currency appreciation, and a housing market that is overheating. It has recommended a mix of expenditure and tax actions.

“The latitude under the budget operation mechanisms to hold spending below budgeted authorizations – including by retention of all the various reserves in the budget – should be applied. But if this greater-than-planned structural consolidation is to be secured, risks on the revenue side – arising from generous official estimates – may also need to be addressed. With discretionary spending restraint already assigned to strengthen the deficit, action may be needed on indirect taxes,” it said.

The IMF approved of the government’s intention to raise taxes on gas and oil resources, saying:

“The establishment by the Ministry of Finance of a commission to review the current tax arrangement is most welcome. Its general intention to raise the ‘tax take’ from these activities to advanced country norms is fully appropriate; in part as a fair tax system is also more likely to be stable. We encourage other reforms to adopt international best practice in this area, including appropriate pricing arrangements in the tax and to secure appropriate intergenerational distribution of the proceeds. Accordingly, the first use of such tax receipts should be to reduce public debt, given that overall revenues will be modest on current estimates of the volumes of gas. But if large additional finds are made, revenues should be placed in a sovereign wealth fund."

“Israel passed through the global recession swiftly, the fruit of decisive policies and strengthened macro financial policy frameworks. In our view, buoyant activity and employment alongside incipient inflation pressures calls for the overall stance of policies to be tightened more quickly than planned. But the onus for the accelerated effort should fall mainly on fiscal rather than monetary policy. This shift in the policy centre of gravity will help to contain inflation, reduce upward pressure on the shekel, and support the new fiscal rule."