PM, Steinitz to bring 1% VAT hike to cabinet

Value-added tax is set to rise by 1 percent or more following a decision Tuesday by Prime Minister Binyamin Netanyahu and Finance Minister Yuval Steinitz to bring the proposal to the cabinet on Monday.

Each 1% hike in VAT (which currently stands at 16%) is expected to enrich the government coffers by NIS 4 billion per year. The cabinet will also be asked to make an across-the-board cut for government ministries totaling NIS 700 million.

Government sources in Jerusalem on Tuesday told Globes that the rise in VAT is only a first step determined by Netanyahu as part of a comprehensive plan to raise taxes.

The Knesset Finance Committee passed on Tuesday the cabinet’s decision to double the deficit target from 1.5% to 3%. Steinitz told the committee that the 2013 budget will include tax hikes and spending cuts, but said doubling the deficit target saves the government from having to increase taxes even more than planned.

The new target would help the government remain on track toward the “most important” goal of reducing debt-to-GDP to 60% by the year 2020, Steinitz said.

Netanyahu defended the VAT icrease on his Facebook page, saying, “the economic turmoil around us is not decreasing, but becoming stronger in the world. Last year all the leading states had their credit rating downgraded, the US and the leading countries in Europe. It didn’t happen to us because we stuck to the rules of responsible economic behavior.

“There are no free meals. We are attempting to implement a decision to grant free education in kindergartens – that costs money. We are adding to the fence meant to keep out infiltrators. Last week 16 infiltrators entered, they were all arrested – that is a success that costs money. We are prepared with new technologies and weapons to face new threats – that costs money,” he added.

The prime minister stated that “whoever says it is possible to spend money recklessly, without raising more for populist purposes, is simply endangering the State of Israel and can easily bring us to the situation which we have seen leading European economies fall into – on the brink of bankruptcy.

That hasn’t happened here. I won’t let that happen here.”

Netanyahu’s political opponents were quick to slam the decision.

Opposition leader MK Shaul Mofaz (Kadima) said Netanyahu was killing the middle class, adding that “after turning his back on those who serve in the army in the middle class, now Netanyahu is showing them his middle finger.”

He added: “This is the real face of the prime minister, who continues to trample on the public. These edicts will only deepen the desperation.”

Labor leader Shelly Yechimovich said “the bad old Netanyahu is back and the citizens of Israel will pay a steep price for it. The prime minister took a break from his political zigzagging and returned to where he does not zigzag: harming the middle class.

“Netanyahu prefers raising a cruel and stupid tax like VAT rather than taxing the upper echelons of society and the corporations with fat profits,” she said. “He should stop torturing the middle class and resign.”

Kadima MK Yoel Hasson said, “When Netanyahu deals with buying votes with public money, it is good that there are citizens who can pay for it.”

Former Kadima leader Tzipi Livni said raising the VAT as if there were no socioeconomic protest would harm the middle class and the weak.

“Instead of courageously changing his priorities, Netanyahu is letting Israel enter tough economic times with a bloated government with sectarian political priorities,” she said.

On Monday, the Bank of Israel held the benchmark interest rate at 2.25%, citing “uncertainty in fiscal policy” as one factor. It said the government must raise taxes to avoid exceeding its already increased debt goals and warned of a possible erosion of fiscal credibility.

If next year’s deficit target were set at 2.5%, as Bank of Israel Governor Stanley Fischer and other officials have recommended, it would necessitate a further NIS 5 billion tax hike, Steinitz said Tuesday.

The government’s increased budget deficit target for next year is not reasonable and interest rates are unlikely to stay low unless fiscal policy is put on a “sustainable” path, Fischer said on June 28.

The bank noted in Monday’s decision that under current arrangements the deficit would reach 4% unless taxes are increased.

“To date, decisions have not been reached regarding how the government intends to meet this target,” the bank said. This raises concern “that the credibility of fiscal policy, which was a central component of the economy’s success in dealing with the previous crisis, will erode.”

Globes, Bloomberg and Gil Hoffman contributed to this report.