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.