Lapid submits budget to Knesset

Finance Minister Yair Lapid says we must deal with the deficit or Israel's credit rating will be cut again.

Minister of Finance Yair Lapid today submitted the 2013-14 state budget to the Knesset, where the various committees will discuss its sections. The Finance Committee will discuss the budget's main item, including the NIS 13-14 billion in tax hikes to cover the deficit and achieve a deficit target of 4.65% of GDP in 2013.

"This budget provides a response to the severe deficit crisis which was dug, and we should have acted fast and immediately to preserve the economic achievements," said Lapid. "The second stage is to build an infrastructure for growth by taking measures to bring communities into the labor force and to attract foreign investment. Things have been said about the poor. My heart pains no less when there is a single poor mother and child, but it is important to remember that the poorest people need a strong state, otherwise public services collapse and they are the first to suffer.

"What would happen if we don’t deal with the deficit? We've already had our domsetic credit rating cut. What does this mean? It means that we'll have to pay higher interest. That's money that is thrown away. We want this money for healthcare and defense, not for interest payments. The deficit would only grow then. These things have a way of deteriorating fast. That must not happen, and it's the joint responsibility of all of us. Look what happened to Greece in a short time. So if there are people here who care about the poor, we must not let that happen to us. We must return to the level of Germany. We were there, but we stopped being responsible."

The Ministry of Finance's tax package, which the government passed in May, has generated fierce public and political critic. The plan includes the VAT hike to 18%, which came into effect at the beginning of June, and which is projected to raise NIS 4.6 billion in revenues; levying a 3.5% purchase tax on people moving upmarket, which will come into effect on September 1, if the Knesset approves the measure in its current format; and a 1.5% income tax hike, which will face strong opposition in the Knesset along with the cancellation of the tax exemption on pension deposits.

The Ministry of Finance has therefore been drawing up alternatives and improvements to the tax plan. However, a Lapid aide said today, "We're not planning anything except to go to the Finance Committee." A top ministry official said that it intended to move forward on the tax package that the government approved as is.

But behind the scenes, the Ministry of Finance is preparing alternative measures that will generate tax revenues, but will be more politically acceptable. The ministry said today that there were few alternatives, because the tax plan touches on almost every kind of tax, leaving little maneuvering room.

The Ministry of Finance will try to get the Finance Committee to support levying VAT on fruits and vegetable, a tax distortion which benefits wholesalers and retailers. The ministry also has two alternatives to the 3.5% purchase tax from the first shekel on people moving upmarket: one is to tax rental income; the other is a 1% purchase tax on all homebuyers. The problem with taxing rental income is the shortage of rental housing and landlords will roll the cost onto tenants, resulting in higher rents. Assuming that most tenants do not own another home and that they are low income-earners, such a tax would be far more regressive than a tax on people moving upmarket.

A 1% purchase tax on all homebuyers, including on the purchase of a first home is estimated to generate NIS 1 billion a year. But this is tax is also more regressive than a tax on people moving upmarket, on the assumption that most first-time homebuyers have lower incomes than people moving upmarket.

The Ministry of Finance opposes several alternative tax proposals, which a top official called "populist, with unclear tax revenues generation capability, and which are liable to harm fiscal credibility."

The alternative proposals include tighter tax collection and trapped profits. The ministry also opposes cancellation of the tax breaks under the Law for the Encouragement of Capital Investments, since the tax plan already reduces them. It also vetoed an estate tax, and it will try to rebuff MKs' proposals to raise the marginal income tax rate on high income-earners to 55% and to raise the capital gains tax.

Published by Globes [online], Israel business news - - on June 11, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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