Israel's central bank chief urged the government on Sunday to raise tax revenue by eliminating some tax exemptions in the 2015-2016 budget, rather than relying solely on spending cuts to maintain fiscal responsibility.
Israel's cabinet will debate the long-awaited budget draft on Tuesday and is expected approve it in a vote on Wednesday.
The budget will cover a 13-month period from December 2015, reflecting a delay stemming from March's general election.
Bank of Israel Governor Karnit Flug told a cabinet meeting on Sunday that in order to meet a budget deficit target of 2.5 percent of gross domestic product, an adjustment of 15 billion shekels ($4 billion) must be made.
"It is preferable that balancing the budget not be done only through cuts in the civilian budgets, but also through the cancellation of tax exemptions that have no economic or social justification," Flug told ministers.
"If at this stage it is not possible to reduce exemptions, there is room for some increase in the tax rates in order not to increase the burden of debt that we and our children will pay in the future."
Finance Minister Moshe Kahlon has so far opposed tax hikes.
The 2.5 percent deficit target is the maximum allowable if Israel's debt-to-GDP is to be stopped from rising next year.
Election pledges have complicated spending talks, with coalition parties having demanded some 8 billion shekels' ($2.1 billion) of measures to join Prime Minister Benjamin Netanyahu's government, which controls only 61 of parliament's 120 seats.
Most of the issues that have delayed the budget's passage have been resolved, with a compromise reached last week with ultra-Orthodox allies on changes to child allowances.
That allowed the government to defer 4 billion shekels of spending from 2016 to subsequent years, while the finance ministry has ordered spending cuts of 3 billion shekels to most ministries' budgets.
The ministry wants a higher deficit target of 2.9 percent of GDP next year to accommodate more spending.
One outstanding issue is how much the defence ministry will receive. It has requested 60 billion shekels but the finance ministry has so far capped its budget at 55-56 billion shekels.
Speaking to the cabinet, Flug noted that Israel is 24th of the 32 OECD countries in overall government spending and 31st in civilian spending, at 30.8 percent of GDP versus an OECD average of 43 percent.
Israel's tax revenues are also 24th at 31 percent of GDP, collecting 35 billion shekels less than the average advanced economy.
"Is it reasonable for a country with high defence expenditures such as we have to collect less taxes than most of the advanced economies?" Flug asked.
"Is it unreasonable for the extra defence expenditures to be financed by an increase in revenues?"
The central bank governor noted that Israel's debt burden has held steady since 2013 at 67 percent of GDP.
Parliament's initial vote on the budget is slated for August 31 with final passage scheduled for November 19.
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