Cabinet set to okay tax hikes, spending cuts

Budget cuts expected to pass despite Aharonovich's warning of more crime; only definite no votes will come from Shas.

By GIL STERN STERN HOFFMAN, NADAV SHEMER
Netanyahu Steinitz 390 (photo credit: Reuters)
Netanyahu Steinitz 390
(photo credit: Reuters)
The cabinet will vote Monday on whether to increase income tax for above-average wage-earners and raise the value-added tax by 1 percentage point to 17 percent.
The moves are part of a series of steps the government says will boost state revenues by NIS 14 billion next year.
Finance Minister Yuval Steinitz refused Sunday to rule out introducing further tax hikes later this year on top of those announced last week, but said he hopes there will be no need for such a move.
“This package is supposed to provide a solution for dealing with the deficit, to protect Israel’s credit rating, its investments and economy,” Steinitz told Army Radio. “We are dealing with the deficit so that Israel will not end up looking like Ireland, Spain or Greece. We are doing this now, because if we don’t we will end up paying much more in the future.”
Should the tax increases pass in the cabinet Monday, VAT will increase immediately by 1 percentage point to 17%. Starting on January 1, all income between NIS 8,881 and 41,830 per month will be taxed an additional 1%, while a flat 2% tax will be imposed on all income above NIS 67,000 per month.
Last week, Steinitz signed an order to increase purchase tax on cigarettes, cigars and alcohol. He also announced that the government intends to collect NIS 3 billion owed to it by large corporations, which were exempt from paying tax for certain periods of time under agreements committing them to investing in the economy.
Steinitz’s plan includes a NIS 700 million cut in the budgets of cabinet ministries. Public Security Minister Yitzhak Aharonovitch warned that the expected NIS 180 million cut in his ministry’s budget would lead to “more violence and crime.” Union leaders in the health industry called the Health Ministry’s budget cut “disastrous.”
But Aharonovitch might end up voting for the cuts on orders from his Yisrael Beytenu party chairman Avigdor Liberman. And the health minister will vote in favor, because his name is Binyamin Netanyahu. Deputy health minister Ya’acov Litzman (United Torah Judaism), who runs the ministry, does not get a vote in the cabinet.
The Independence Party’s four ministers will meet on Monday morning to decide how to vote. They flexed their muscles on Sunday, suggesting that they might vote against the plan if cuts to the Industry, Trade and Labor Ministry’s educational technology division were not restored.
Industry, Trade and Labor Minister Shalom Simhon said that if the Education Ministry is exempt from the cut, his ministry should be as well, because it also funds educational projects. Nevertheless, Simhon and the other Independence Party ministers are expected to vote in favor.
Channel 10 reported that Negev and Galilee Development Minister Silvan Shalom and Minister-without- Portfolio Michael Eitan, both from the Likud, might decide at the last minute to vote against the measures.
But the only definite no votes will come from the four Shas cabinet members. Shas chairman and Interior Minister Eli Yishai demanded that the VAT be lowered on water, electricity, and bread.
“Raising taxes will harm thousands of families in Israel, who have already been hurt by the increasing cost of living,” Yishai warned on Sunday night.
Labor chairwoman Shelly Yechimovich released data compiled by her office that show that 67% of the government’s planned tax increases are regressive, meaning that the tax rate decreases as the amount subject to taxation increases, thus affecting poorer people more than the rich.
Yechimovich said the decision to raise income tax on the second, third and fourth income tax brackets, while ignoring the highest bracket (NIS 41,830 to NIS 67,000 per month), imposes an even greater burden on engineers, hi-tech workers and others who she said form the most productive segment of society. She said the value-added tax increase would also enlarge the burden on households, explaining that 27% of the income of the poorest 10th of the population goes toward VAT, compared to just 8% from the richest 10th.
Yesh Atid leader Yair Lapid accused Netanyahu of “torturing the middle class” and wasting its money on political deals and ministers who do nothing.
Bank of Israel Gov. Stanley Fischer reiterated his praise for the government’s steps in a statement late on Saturday, calling them “necessary” to deal with the twin threats of the euro’s collapse and the spiraling budget deficit.
“Given this situation, the prime minister and finance minister’s measures are brave and essential for improving our budgetary situation in 2013. They will enable us to manage the economy and support growth – to the good of the country’s citizens,” Fischer said. “The Bank of Israel will continue to conduct monetary policy that maintains price stability, supports growth and guards the stability of the financial system.”
Tzvi Oren, chairman of the Federation of Israeli Economic Organizations and president of the Manufacturers Association, convened an urgent meeting of the federation’s presidium on Sunday evening, to discuss how to deal with the imminent tax hikes.