Tomorrow, the cabinet is due to approve a NIS 14.4 billion fiscal package (amounting to 1.5% of GDP) of tax hikes of almost every kind. This is a fiscal consolidation the likes of which Israel has not seen since the stabilization plan of 1985. The fiscal package aims to deal with a global crisis, economic slowdown, and most of all, the government deficit for 2012-13, which threatens to go out of control and is liable to reach 6% of GDP in 2013, double the new target.
Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz and their teams continued to discuss the fiscal package on Friday, when it was estimated at NIS 11 billion. The package includes a 1% VAT hike to 17%, a surtax on high incomes, higher taxes on cigarettes and alcohol, a tax break on trapped profits, and stricter tax collection.
Ministry of Finance director general Doron Cohen told "Globes" on Thursday that more measures were in the offing, and that the issue under discussion was whether to draw up another package in a few months or to add more measures to the current package, because the measures decided on would not be enough to cover the 2013 deficit.
On Friday afternoon, Netanyahu decided on a single expanded fiscal package, which will include an income tax hike on salaries over NIS 8,860 a month, no income tax bracket revision based on the rise of the Consumer Price Index (CPI), a higher employer's tax, higher vehicles tax, higher purchase tax on apartments for investment, no reduction in the purchase tax on home entertainment systems decided a month ago, and lowering the threshold on the surtax on income and capital gains from NIS 1 million to NIS 800,000.
Netanyahu vetoed two proposed measures: raising the companies tax by 1%, which was supposed to generate NIS 750 million; and, together with Steinitz, to cancel tax exemptions at this time. The main exemptions - export subsidies, VAT on fruits and vegetable, VAT in Eilat, income from advanced training funds, and the betterment tax - would have immediately generated an NIS 10 billion in tax revenues.
If the Ministry of Finance's estimates are accurate, the fiscal package will generate NIS 14.4 billion in tax revenues, of which NIS 5 billion depends on the success of the tax break on trapped profits and the stricter tax collection plan. Calculations by the Budget Department indicate that a permanent need for an extra NIS 13 billion in tax revenues a year. 49% of this extra income will come from higher direct taxes (income tax) and the rest from higher indirect taxes (VAT and consumption taxes).
Governor of the Bank of Israel Prof. Stanley Fischer, who headed the demand for fiscal consolidation, welcomed the fiscal package, saying last night, "The measures presented in the past two days by the prime minister and finance minister are essential to deal with the complex economic situation facing Israel. On one hand, the global economy is in serious shape, which is already affecting Israel's economic growth. There is even a chance that we'll soon have to deal with the consequences of a worsening of the crisis in the eurozone.
"On the other hand, there are problems due to the large budget deficit, which if not dealt with, will result in us having an even larger government deficit in 2013. This possibility has already caused fiscal uncertainty about Israel's ability to manage the economy at the level required. In view of this situation, the measures taken by the prime minister and finance minister are courageous and critical for dealing with our budget circumstances in 2013. They will enable us to manage the economy in a way that will support growth for the good of the country's people."
The fiscal package includes measures, albeit negligible, on the spending side. A NIS 700 million across-the-board cut in ministries' budgets for 2012 and NIS 500 million in 2013 to finance the construction of holding facilities for illegal migrants and for the reform of the Israel Fire and Rescue Services. The cuts affect ministries' operating budgets, not their commitments and salaries. However, in contrast to previous promises, the present cut includes the Ministry of Defense, the Ministry of Education and higher education, the Ministry of Social Services, albeit by less than at other ministries. Big cuts will be made at the Ministry of Industry, Trade and Labor, headed Shalom Simhon (Ha'atzma'ut), and by ministries headed by Yisrael Beitenu chairman Avigdor Liberman - the Ministry of Foreign Affairs, the Ministry of Immigrant Absorption, and the Ministry of Public Security.
More austerity on the way
Belying remarks by Steinitz over the last couple of days, that he sees no need for more austerity measures, top officials at the Ministry of Finance, the Bank of Israel, and the Prime Minister's Office believe that a huge NIS 13.5 billion cut will be needed in the 2013 state budget. The spending cut is needed to meet the budget framework (including spending), after the 5% across-the-board cut in the 2012 budget and the 3% cut in across-the-board cut in the 2013 budget.
The main objective in the economic plan for next year that the Budget Department is preparing, which is due to result in the drawing up of the 2013 budget, is to project economic growth and jobs by maintaining equality of opportunity. Top Ministry of Finance officials therefore concluded that any cut in education, jobs, or infrastructures will conflict with policy goals.
The Ministry of Finance has therefore chosen the tough road, because cuts in these areas are the easiest to make since they raise the least resistance from pressure groups. "The easiest thing for us would be to cut education, the Trajtenberg recommendations, trains, and roads. Within a second, we'd have all the money we need. But we've chosen the tough road. If we succeed, we'll succeed; if we crash, we'll crash. But that's our challenge as the Ministry of Finance," a top ministry official told "Globes" six weeks ago.
Therefore, the big cuts could come in fields with big budgets that do not generate growth: defense (NIS 65 billion), National Insurance Institute welfare payments (NIS 75 billion), and public sector salaries (NIS 100 billion). Cuts in these areas will ignite open warfare with Minister of Defense Ehud Barak, a key coalition partner; with Histadrut chairman Ofer Eini; and with several Likud ministers, such as Minister of Social Services Moshe Kahlon and Minister of Galilee and Negev Development Silvan Shalom; and with haredi (ultra-orthodox) coalition partners in Shas and United Torah Judaism.
Published by Globes [online], Israel business news - www.globes-online.com - on July 29, 2012
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