Bank of Israel Governor Stanley Fischer on Thursday backed Prime Minister Binyamin Netanyahu’s plan to raise VAT by 1 percent, reversing his criticism of the government’s economic policy in June.

“Last month I was somewhat critical about the government’s fiscal policy, but what I have seen in the past two days is very serious progress and very responsible conduct by the economic decision makers,” Fischer said after meeting with Netanyahu and Finance Minister Yuval Steinitz to discuss the 2013 state budget.

“I hope that within no more than a few days we will see a package that will really change the Israeli economic situation and allow us to continue to grow at a very respectable rate,” he said.

Earlier this week, Netanyahu and Steinitz announced they plan to ask the cabinet to vote Monday on proposals to immediately increase VAT from 16% to 17% – the highest level since 2005 – and to introduce an across-the-board NIS 700 million cut to government ministries. These proposals are likely pass because not one of the 15 Likud ministers has announced opposition.

Purchase tax on cigarettes, cigars and beer rose Wednesday at midnight in a move expected to increase this year’s state revenues by about NIS 1 billion. The cigarette purchase tax rose from 260.6% to 278.6%, adding NIS 2 to NIS 3 to the price of a pack. The beer purchase tax rose from NIS 2.18 to NIS 4.19 per liter.

On June 28, Fischer slammed the government for doubling next year’s budget deficit target to 3% of GDP, calling the measure unreasonable and warning that interest rates could not stay low unless fiscal policy was put on a “sustainable” path. He recommended increasing the deficit to no more than 2.5% of GDP, a percentage Steinitz has said would force the government to cut a further NIS 5b. in spending.

Following Thursday’s meeting, Netanyahu said the middle and lower classes “will be left with more money in their pockets” after the implementation of all the measures on the government agenda.”

“I remind you that in a few days we will enact free education from age three,” he said, “[and] hundreds of thousands of families will save NIS 800 a month. We enacted tax credit points for working families worth hundreds of shekels a month, which took effect in January 2012. We enacted serious reductions in monthly cellphone bills, and we enacted free dental care for children up to age 12. This is a great change, at the end of which the majority of Israelis will be left with more money in their pockets.”

Steinitz said the government’s priority was to protect the Israeli economy and to prevent the problems of the US, UK, Spain and Greece from occurring here. The 3% deficit target was attainable, he said, but to reach it the government would need to make “unpopular decisions” and then stand by them.

“We are doing these things… to tell the entire world – after we saw the warning about Germany’s credit rating – that we are serious, we are responsible, we will continue to defend the Israeli economy and Israeli citizens from crisis,” Steinitz said.

Labor leader Shelly Yechimovich said Netanyahu was right to say families would have more money in their pockets following the expenditure cuts, but he could only have been talking about wealthy families and not about the broader public.

“There is a limit to the fairy tales that can be told to the public,” she said in a statement, “and Netanyahu is knowingly misleading them when he says the lower and middle class will have more money in their pockets. The VAT increase will make the life of every Israeli immeasurably more expensive. The poorer they are, the more tax they will pay, the exact opposite of the fair method of taxation that is relative to income.”

“The budget expenditure cuts will also force families to take money out of their own pockets for medical and other basic services that they should receive for free,” Yechimovich said. “The most outrageous part is that Netanyahu has available resources to fill the giant hole that he himself has created, only that these resources come from the wealthy and he prefers to fill the hole with the money of the middle class and the poor.”

Former Bank of Israel governor David Klein criticized the government Thursday, saying it has no long-term plan and of makes decisions too quickly.

“It appears as if somebody is frightened and said that something big needs to be done quickly,” he told Army Radio. “That is not the way you manage a state budget.”

Gil Hoffman contributed to this report.

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