Sometimes, it is necessary to put in a good word. Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz's decision to immediately raise taxes by NIS 13-14 billion in annual terms is the right step.
It is possible to argue about the plan's structure, and I will get to that in a moment, but it is clear that this was a publicly difficult measure, unquestionably unpopular, but it was economically correct and critical.
It is possible to wonder whether the pressure by the rating companies, Governor of the Bank of Israel Prof. Stanley Fischer, the staff at the Ministry of Finance's Budget Department, and by many economists tipped the scales, but that is already less important. The die is cast, and assuming that the plan is approved in full by the political bodies (the government, the Knesset Finance Committee), then Israel can be proud that, in contrast to countries in Europe, here, the right measures are taken at the right time. This is an honor for the Israeli economy.
The people who say that, in some cases, Netanyahu took the easier, and maybe not always the best, measures to pass, are right. It is possible that it would have been better to raise the companies tax instead of the employers tax, because while the former is levied on profits, the latter is levied on salary expenses including on loss-making companies, which is liable to worsen their condition further. Moreover, the employers tax is a disincentive against hiring, and is therefore liable to further worsen the unemployment rate beyond what is expected because of the slowdown.
Dealing with the tax exemptions, which amount to tens of billions of shekels, is called for, as this could avoid the need to raise VAT, which will mainly hurt the poor, whose entire income is oriented to consumption.
It seems that Netanyahu remembered the fiasco of former Minister of Finance Ronnie Bar-On, who tried to cancel the tax exemptions on the employers' share of advanced training funds, and Netanyahu undoubtedly does not want to confront his own remarks about the importance of cutting the companies tax to foster growth. That is why he chose the measures he did.
If this were not enough, the government budget will also be based on revenues with dubious chances of being collected: trapped profits (NIS 3 billion), and stricter tax collection (NIS 2 billion).
Increasing government debt
But, and it is a big but, the measures taken are very far from sufficient. The current measure is only the first half of the big plan.
Let me explain. In order to meet the 3% of GDP deficit target for 2013, it is necessary to raise taxes by NIS 13 billion, but it is also necessary to cut the budget by NIS 12 billion. The government cannot choose to levy additional taxes in order to meet the deficit target without cutting expenses, because in addition to the deficit target, the Budget Law includes a spending cap, and given the salary agreements approved over the past year, as well as the approval of the Trajtenberg Committee recommendations, and other things, spending will likely exceed the cap (which is 2.9% higher in real terms than in 2012) by NIS 12 billion. The significance of these measures is dramatic.
While the tax hikes will serve the objectives of the social protest - free education for children aged 3-4, tax credit points for fathers of children aged 0-3, reducing duties on a range of products, free dental care for children, etc. - expectations of receiving more services are liable to evaporate.
When the government is required to make additional budget cuts, beyond the NIS 2 billion cut now being implemented, the education, welfare, defense (including public safety), and health budgets will be affected, because it is not possible to divert a NIS 12 billion budget cut on to a few ministries. The necessary budget cut will affect the quantity and quality of services that people receive from the government.
It is important to realize that we are now in a state of "no choice". The world is global and the Israeli economy cannot avoid the repercussions of the global economic crisis. So long as the crisis lasts, and even worsens, Israel will also have to pay the price, and we must therefore take the right measures quickly to avoid deteriorating to the situation in which a long list of European countries are now found.
It should be remembered that Israel pays NIS 40 billion a year in interest payments on its debts. Any deviation from the already high deficit target will increase the government's debts, increase the annual interest payments, both because of the size of financing needs and also because of the rise in the risk premium (on bond yields), and will further reduce the government's ability to provide services to the public, so that not only will we not receive more than we do now, we may even receive less.
The writer is the chief economist and strategist at Psagot Investment House Ltd.
Published by Globes [online], Israel business news - www.globes-online.com - on July 31, 2012
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