As oil prices rise, can Treasury afford gasoline excise cut?

Delek credit: Sivan Faraj
Delek credit: Sivan Faraj

This month alone, Ministry of Finance estimates are that the loss of state revenue due to the cut will be NIS 231 million.

Since Russia's invasion of Ukraine in early 2022, the Ministry of Finance has temporarily reduced excise tax on fuel, which is revised each month. These cuts are designed to curb the effects of the increase in fuel prices, which generates significant inflation, and to keep the government controlled price of 95 octane unleaded gasoline unchanged each month. Following the over 10% jump in the price of oil over the last month and the ongoing erosion of the shekel against the dollar, there is a question mark on how long Minister of Finance Bezalel Smotrich will be able to continue with the current subsidies.

Since April 2022, when previous Minister of Finance Avigdor Liberman, initiated the policy, Israel's Treasury has lost billions of shekels in fuel tax revenues. This month alone, according to Ministry of Finance estimates, the loss of state revenue as a result of the move is expected to be NIS 231 million - an amount significantly higher than the subsidy in previous months. In the past, Ministry of Finance officials opposed the continuation of the excise cuts, without a systematic plan.

The options on Smotrich's table

The tax cuts on fuel do not involve actual government spending, but the Ministry of Finance needs to find a source for them in the state budget due to the damage to revenues. "Globes" has learned that the Ministry of Finance estimates that the sum allocated for the fuel discount in the 2023 budget will not suffice through to the end of 2023, at the current rate where the cost is hundreds of millions of shekels each month.

What will happen when the money for the temporary fuel excise cut runs out? Smotrich will then be faced with three options: to restore excise to its previous level, which could lead to a spike in gas station prices, which would be the most difficult option for any politician; the second option would be to continue the existing policy while cutting other budgets, which would also be unpopular option; and the third and easiest option, but fiscally problematic would be to increase the deficit.

The fiscal deficit over the past 12 months already stands at about NIS 18 billion, which is 1% of GDP. In the state budget approved last May, the government set an ambitious fiscal deficit target of 1.1% for the end of 2023, but already after seven months, the deficit is just 0.1% short of that. In the last few weeks, Smotrich held a meeting of senior officials at the Ministry of Finance where he instructed keeping budgetary restraint as tight as possible. It will be interesting to see how he instructs his officials to act in the next update of the fuel, as the cost of the subsidy looks set to increase.

Over the years there has been criticism of the high fuel taxes in Israel. Last year, NIS 18.6 billion flowed into the Ministry of Finance coffers from fuel excise tax, up 2% from 2021, despite loss of revenues from the tax on fuel in during most of 2022. The Ministry of Finance has for several years been considering replacing the excise system, which applies only to gasoline and diesel, with a new journey tax that would also apply to electric vehicles. Either way, the current policy of playing with the amount of tax every month was supposed to be only a temporary plaster, not a permanent solution.

The current price of a liter of 95 octane unleaded gasoline is NIS 6.86. According to Ministry of Finance figures, in August there was a tax cut that lowered the price by NIS 0.89 per liter. In other words, the real price should be NIS 7.75 per liter. Thus, an average car owner would pay about NIS 40 more per tank at the pumps. And when fuel becomes more expensive, then the transport costs also rise, pushing up prices in a range of industries and goods, so this policy also curbs inflation.

Cutting fuel prices was an election pledge by Prime Minister Benjamin Netanyahu. Before the establishment of the current government, the price of a liter of gasoline was NIS 6.85, so in practice the price has not been cut, but remained at the same level. However, since the beginning of 2023, the shekel has weakened significantly against the dollar, so that it costs the current government much more money to keep the price of fuel stable, than for its predecessor.

In addition, there has been a sharp increase in oil prices on world markets. Last week, the price of a barrel of Brent crude crossed the $88 mark, the highest since January. Reasons for this include record global demand of 103 million barrels in June, according to the International Energy Agency (IEA), while at the same time the production rate of the OPEC+ countries remains low. The agency explains the extent of demand doe to higher than expected demand growth in OECD countries, in busier air traffic and a surge in China's consumption. All this while Saudi Arabia has announced that it will continue to cut oil production.

Published by Globes, Israel business news - - on August 14, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Delek credit: Sivan Faraj
Delek credit: Sivan Faraj
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