The cabinet approved a series of sweeping austerity measures Monday, including tax hikes and spending cuts which it hopes will raise NIS 14.15 billion next year and reduce the budget deficit by 1.5 percent.

The plan passed by a vote of 20 to 9, with the four Shas ministers, the four Independence Party ministers and Social Welfare Minister Moshe Kahlon (Likud) voting against. When Finance Minister Yuval Steinitz saw that Defense Minister Ehud Barak was voting against it despite his ministry being exempt from the cuts, Steinitz decided to slash NIS 100 million from the defense budget.

Late Monday night, Prime Minister Binyamin Netanyahu announced that part of the NIS 100m. will be used to fund the fortification of the Barzilai Hospital, while the other half will go towards easing planned cuts to education programming.

According to the plan, value-added tax will rise by one percentage point to 17% Wednesday. All income between NIS 8,881 and 41,830 per month will be taxed an extra 1%, while all income above NIS 67,000 per month will be charged a 2% surtax, starting January 1.

Netanyahu acknowledged that the package was “harsh,” in his comments at the start of the weekly cabinet meeting, but he said the global economy was deteriorating and that the time has come to take additional steps to protect the Israeli economy and Israeli jobs.

“Governments that did not act in time, did not take determined action and did not act responsibly, caused great harm to their people, both in terms of mass unemployment and in terms of crumbling social systems,” Netanyahu said, in reference to the conduct of Greece, Spain and other struggling European countries in the past few years.

“We will not allow that to happen. I will not allow that to happen. We need to act responsibly, with determination and in time,” the prime minister said.

Steinitz said the reforms were “not enjoyable,” but stressed that the government must show it will meet next year’s 3% deficit target and maintain Israel’s “good image” as an island of economic stability and place for investment. He added that the measures were being taken “not only for the economy, but for the people,” so that Israelis do not suffer the same fate as their counterparts in Europe and the US.

Under the package, tax for the fourth highest income bracket, those earning between NIS 8,881 and 14,430 per month, will increase from 21% to 22%.

Tax for the second and third highest income brackets will rise 1% to 31% and 34% respectively. Tax for the highest and two lowest income brackets will remain at 48%, 14%, and 10% respectively.

Employers will also share the burden. Their contributions to the National Insurance Institute for all workers earning over 60% of the average salary will rise from the current 5.9% to 6.5% in 2013, 7% in 2014, and 7.5% in 2015.

A temporary order introduced in February 2011 which increased the purchase tax on investment apartments will be extended to the end of 2013. The order stipulates tax of 5% on properties costing up to NIS 1 million, 6% on properties costing NIS 1 to 3 million, and 7% on properties costing NIS 3 million and above.

The Green Tax, which sets purchase tax rates for vehicles based on their pollution levels, will be updated according to the latest Environmental Protection Ministry data.

In a bid to bring in around NIS 5 billion in revenues, the Tax Authority’s power to enforce regulations will be strengthened, larger fines will be imposed on businesses caught making black market transactions and the Encouragement of Capital Investments Law will be amended to allow for tax collections from large corporations that benefit from specific arrangements with the state.

In addition to all these reforms, the government last week increased the purchase tax on cigarettes and cigars from 260.6% to 278.6%, and purchase tax on beer from NIS 2.18 per liter to NIS 4.19 per liter.

On the expenditure side, the government will implement an across-the-board 5% cut to ministry budgets for the remainder of this year and a further 3% cut next year, to finance what Netanyahu and Steinitz have called “changes in priorities.”

Only the Education Ministry escaped such a massive cut: Its budget will be reduced by 1% this year and an extra 3% next year.

About NIS 700 million shekels will be diverted toward three tasks: preventing migrants from crossing into Israel from Sinai, reforming the national firefighting system and preparing the Home Front for an emergency.

Netanyahu promised the government would not reverse any of the actions it took to reduce the cost of living as part of its implementation of last year’s Trajtenberg Report. He said 300,000 families will still save NIS 800 per month when free education for children ages 3 to 4 and free after-hours education care for children ages 3 to 9 is implemented in September, and that close to 400,000 families will still receive hundreds of shekels in tax credits.

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