This evening, Minister of Finance Bezalel Smotrich and Ministry of Finance officials presented the aid plan formulated for the Israeli economy following the outbreak of war. The main points are the provision of grants to cover fixed costs for businesses throughout Israel that have suffered a hit to revenue because of the security situation, and a degree of state participation in the pay of workers who cannot reach their places of work. "The cost of the grant is NIS 4.5 billion," Smotrich said. "The source will be the property tax compensation fund, which currently stands at NIS 18 billion. All the remaining measures will be funded through a change in priorities within the budget, and in the next few days I will also introduce an increase in the expenditure framework."
Ministry of Finance director general Shlomi Heizler filled in the details on the compensation program. "The most important thing at the moment is a return to full business activity. Some of the solutions are good for small businesses, and some of them for large businesses. But the plan relates to the point we are at, it is suitable for the current situation.
"As far as the grants are concerned, we are dividing the country into border area settlements that are close to the fences in the south and the north, where full compensation will be given in accordance with one of the tracks specified by the law, and the rest of the country. Ashkelon will be appended to the area that receives full compensation - this is a city that has been under heavy fire, and the step is an obvious one. The second part of the plan concerns the rest of the country. This is the first time that this has been done in wartime. We are now working on criteria to define other areas where it is important to give higher compensation than in the country as a whole."
Incoming Israel Tax Authority director Shay Aharonovich outlined the principles of the grant. "We will compare the revenue reports of the businesses to the reports for the same period last year," he said. "A business that reports monthly and shows a decline of 12.5% or more will be entitled to a grant. We will then examine the business’s fixed costs. For that, we take a certain percentage of the business’s inputs. We will examine the input costs for the whole of 2022, and divide the total by twelve to get the business’s monthly input. A business will be entitled to 18% of its input component for 2022. This is limited to a ceiling of up to NIS 400 million revenue, which covers almost all the businesses in Israel apart from about 100 large ones."
"We’ll raise the deficit"
"In the home front cabinet today we formed the rehabilitation area administration," Smotrich said. "We allocated an initial NIS 1 billion and dozens of job slots. We will provide all the tools required to rehabilitate that part of the country.
"Even if there were glitches in the first few days, and I understand the criticism, today we are fully embracing the survivors and the residents of the north.
"In the past few days, I have consulted wiser and more experienced people than me when it comes to the economy. I have held meetings with former ministers and other senior figures. I consulted, and I received answers, and I thank everyone who put politics to one side," Smotrich added.
"We will expand the fiscal deficit, so it will be 3%, perhaps 3.5%, not a disaster," Smotrich said. It should be mentioned that the general expectation is that the deficit in 2024 will be much higher, at around 7-8% of GDP. In the Ministry of Finance itself, even before the outbreak of war, it was estimated that the deficit would reach 3% next year, because of a slowdown in the economy and the impact of the government’s judicial overhaul. The original deficit target was 1.3%. Smotrich’s estimate, if he means 2024, therefore sounds completely unrealistic, especially if he really intends to increase the spending limit by legislation.
"We are presenting a much broader program than the one during the Covid pandemic," Smotrich said. "We strove to make the response more precise. I know that it isn’t perfect, but it was important to formulate a rapid, immediate plan that will already apply in October.
"The Israeli economy is strong and can sustain the military and civilian war effort as much as is required," Smotrich said. "Our debt to GDP ratio is excellent, the planned deficit is low, GDP has tripled in under twenty years, and the property tax fund is full. We have money, and we will use it now for everything that is needed with a generous hand. We have halted everything in the budget that wasn’t important, and we are diverting it all to the needs of the war and support for the economy. Within the next few days, we will increase the budget framework in the Knesset, and create maximum flexibility for ourselves."
Ministry of Finance Budget Division head Yogev Gardos provided further details about the aid program. "We are still at the start of the event and in great uncertainty. Today, according to the Home Front Command’s instructions, most businesses can continue to function. That is important to national resilience and to the war effort. On the cash flow plane, relaxations worth billions of shekels have been given to businesses. We have deferred VAT payments, and today it was decided to expand negative income tax for 300,000 people starting in December. At the same time we are working on immediate payments to reserve soldiers.
"The aim of the grant is that businesses should continue to work. A business that continues to work will gain more than one that stops working and receives grants. As far as the grant itself is concerned, qualifying businesses will be those with turnover of up to NIS 400 million. A business whose revenue has declined 25% in two months, or 12.5% in one month, will receive help. Larger businesses will receive cash flow assistance.
"This war will be costly, there will be a great deal of expenditure, and we don’t yet know how much. The deficit will grow, and in the nature of things state revenues will fall. We are first and foremost designating all the resources for the fighting, but also for supporting activities. Every shekel spent here will have to be raised afterwards, and interest costs are high. We will have to think through our steps well."
Published by Globes, Israel business news - en.globes.co.il - on October 19, 2023.
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