Government ministers and Ministry of Finance officials are in for a late night on Thursday next week when they convene to approve the 2023-2024 budget, a session that usually continues until the small hours.
Until then, the Ministry of Finance will be working on final details of the draft budget and the accompanying Economic Arrangements Bill. Earlier this week, Minister of Finance Bezalel Smotrich and his staff presented the budget plans to the attorney general and the prime minister. Smotrich presented the plans under six headings.
Housing: Incentives for local government
The main solution that Smotrich proposes for the problem of home prices is to boost supply by local authorities. He intends to achieve this through incentives for local government to prioritize projects.
First of all, this means a negative incentive for promoting construction for business. Arnona (local property tax) paid by businesses is much more profitable for municipalities than arnona from residents. Residential construction projects, which involve spending on infrastructure and education, are loss makers as far as city mayors are concerned. The Economic Arrangements Bill contains a provision for levying a charge on municipalities for any increase in arnona from businesses, to be paid into a special fund.
Alongside the stick, the Ministry of Finance is also offering a carrot. Business arnona accumulated in the fund will be used for grants to municipalities and local councils for every new housing unit they approve.
National Infrastructures Law to accelerate project execution
One of the constraints on economic growth in Israel is the foot-dragging over infrastructure projects. Important developments have been delayed for years, from construction of the Tel Aviv area Metro, to power production projects, to commissioning of a new international airport.
The delays are often caused by lack of coordination between the various government agencies, and the National Infrastructures Bill seeks to solve this. On this matter, Smotrich seeks to restore an abandoned plan of the previous government. The bill "will facilitate acceleration of execution of infrastructure projects and will halve the time it takes to complete them."
The bill provides for a short list of projects to be given high priority in the planning process, and procedures for dealing with obstacles causing difficulties for contractors and government companies.
Smotrich seeks to concentrate in his hands planning powers that in recent years have been scattered among various ministries. He has appointed as director general of the Ministry of Finance Shlomi Heisler, who headed the planning staff under Ayelet Shaked at the Ministry of the Interior. Smotrich may seek to revive the planning staff at the Ministry of Finance.
Cost of living: Promoting competition
Smotrich has said that he will promote "significant measures for promoting competition and reducing concentration in the food and agriculture market, in banking, in insurance, and in the vehicle market."
One of the main reforms in the list is the plan to weaken the food importers. The Ministry of Finance believes that the plans for reducing food prices to consumers should focus on imports.
The main measure proposed is to forbid importers from making more than one agreement with a large manufacturer, and they will have to give up other import franchises. The plan will arouse opposition from the businesses.
On agriculture, Smotrich seeks to revive the reform on produce that his predecessor Avigdor Liberman tried to introduce but that was halted by objections from his coalition partners. The farmers opposed full opening of the market to imports through reductions in customs duties and the removal of quotas, and the second round of that battle has already begun.
On banking, Smotrich will appoint a "committee for promoting competition in the financial system." It will examine ways of removing barriers to entry for new players. Smotrich has decided to adopt the recommendation of the previous director general of his ministry, Ram Belinkov, to take regulation of the credit card companies away from the Bank of Israel.
Reducing bureaucracy
"We shall get rid of superfluous regulation in food importers and adapt it to the European standard, we shall cut bureaucracy for hundreds of thousands of small businesses in tax payments, and we shall make the licensing mechanism easier for industrial plants," Smotrich said. What exactly did he mean?
In food, besides the reform plan outlined above for restricting importers, the Ministry of Finance has sought for a long time to make it easier for small importers to enter the market.
The previous government created a fast track for imports of cosmetics and other products on the basis of a declaration that the goods meet recognized international standards, without the need for inspection by the Standards Institution of Israel. An attempt was made to pass similar legislation for imported food products, but the Ministry of Health refused to divest itself of its authority in regulation of food products. Smotrich now intends to fulfil the intention of the previous government.
Another of Smotrich’s plans relates to exempt businesses, those with annual turnover of up to NIS 107,700. Under the proposal, they will not be obliged to report expenses recognized for tax purposes, and in effect will no longer have to keep receipts. Instead, 20% of annual revenue will automatically be deductible, and the rest will be taxed.
Streamlining the public sector
The main arena for reform in the public sector is the rooms in which negotiations are conducted between the Ministry of Finance and the Histadrut (General Federation of Labor in Israel), but the Economic Arrangements Bill does contain relevant provisions. The first step mentioned by Smotrich is "reducing the burden on the health system by making the process of certifying sick days and obtaining prescriptions more efficient."
Smotrich continued, "We shall introduce steps for streamlining manpower and the budget in the defense establishment." This issue has been a concern of the Ministry of Finance in all budget discussions down the years. The defense establishment demands large additions to its budget, while the ministry expects the IDF to curb its salary costs, and protests at the army’s failure to meet targets for reducing the average pension of army veterans.
Restricting use of cash
Last year, the Ministry of Finance tried to introduce a plan for eliminating the black economy, with an emphasis on organized crime in the Arab sector. The proposal was included in the draft Economic Arrangements Bill, but was shelved because of the election. The plan for restricting holdings of cash, "the main factor sustaining the crime organizations" according to Smotrich, is now coming out of the drawer.
Last August, restrictions came into force on payments in cash (up to NIS 6,000 to a business and NIS 15,000 between individuals). In addition to that, a ceiling of NIS 200,000 will now be set on holdings of cash at a home or business, with some reliefs for large businesses.
After surveying the reforms, Smotrich added a remark aimed at his coalition partners and at the financial markets and the credit rating agencies: "We will have to ensure that the ministers’ expectations are realistic, and to understand that compromises will be required in the light of present circumstances.
"Restraining expenditure conveys the message to the public, the rating agencies, and investors, that the budget is professional and responsible." After the government approves the budget, it will be laid before the Knesset, in a process supposed to be completed by the end of May.
Published by Globes, Israel business news - en.globes.co.il - on February 15, 2023.
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