Israel’s Ministry of Finance has been quietly preparing a backup 2025 budget plan in case the government avoids passing a 2025 budget for political reasons, sources familiar with the situation have told "Globes." According to the original timetable, the cabinet was due to approve the budget proposal this week but there is still currently no budget framework. The backup plan, led by Ministry of Finance director general Shlomi Heisler, includes a list of reforms and legal amendments, which aim to cut government spending before the contingency budget comes into effect.

Allowances and taxes

The Ministry of Finance package of measures amounting to NIS 20-25 billion in fiscal consolidation - a little more than 1% of GDP. The list of measures includes merging the two lowest income tax brackets, so that those with low wages will pay higher tax. Today, those with a monthly wage of NIS 7,010, pay 10% tax. The second bracket, with a monthly wage of up to NIS 10,060, pays a 14% rate. According to the Ministry of Finance’s estimates, this move alone should increase the state's annual revenues by some NIS 2 billion.

Another step proposed by the Ministry of Finance will raise opposition from the haredi parties. Child allowances paid by the state for the sixth and seventh child are currently higher than allowances for each of the first five children. The Ministry of Finance proposes paying the same amount for every child from the sixth child onwards to the amount paid for the first five children.

The plan also includes freezes on various updates, with the aim of preventing an automatic increase in government spending from January 1. Thus, updates of income tax rates, tax credit points, real estate tax rates, National Insurance benefits, and the adjustment of the minimum wage to the average wage in the economy will all be frozen. These measures are considered relatively "soft", since they do not impose new taxes on the public but temporarily deprive them of new financial benefits. A more complex freeze that the Treasury wants to pass is the salary increases planned for hundreds of thousands of public sector workers next year, which would require the agreement of Histadrut chairman, Arnon Bar-David, to change the framework agreement he signed.

The list also includes familiar measures to cancel tax benefits, which the Ministry of Finance has already tried to pass in the past without success: the cancellation of the tax exemption on personal imports from abroad up to a price of $75, which is mainly aimed at online shopping; "dealing" with the VAT exemption on inbound tourism; and imposing VAT on foreign digital services, the so-called "Netflix tax."

There will be no choice

So far, top Ministry of Finance officials have held three discussions on the subject. By August 22 a final summary of the plan will be presented and by September 1, the legal details will be agreed with the Ministry of Justice in order to receive the necessary opinions. On September 15, preparation for the legislative proposals would have been completed.

Minister of Finance Bezalel Smotrich is not involved the backup plan, but he is aware of its existence. But eventually the plan will require approval of the politicians in order to be implemented. This raises the question, if the politicians are avoiding politically painful steps, why would they approve the package offered by the Ministry of Finance? The answer, according to sources in the Ministry of Finance, is that eventually they will simply have no choice.

Additions of tens of billions of shekels are on the agenda for the defense budget even in an optimistic scenario that there is no war in Lebanon and Gaza in 2025, while fear of further credit rating downgrades and damage to Israel's prestige among foreign investors may push the government into "involuntary cuts" at the last minute. If that happens, the professional tier at the Ministry of Finance will have a plan ready to go.

In addition, the measures chosen by the Ministry of Finance are ‘soft’ compared with the original proposals for the budget, where there was talk of cuts and tax increases of NIS 30-50 billion. So to some extent, the plan can be seen as a compromise with Smotrich and Netanyahu. The Ministry of Finance is not sure that this will prevent the use of the idea of Netanyahu's economic advisor, Prof. Avi Simhon, to use extra-budgetary amounts as during the Covid crisis, which would increase the fiscal deficit, but would make it possible to reduce tax hikes and maintain government allowances and payments.

Published by Globes, Israel business news - en.globes.co.il - on August 12, 2024.

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