Finance C'tee approves 17% VAT rise

VAT raised next month to help achieve new budget deficit target; targets corporations and above-average earners.

By NADAV SHEMER, GIL STERN STERN HOFFMAN
Finance Minister Yuval Steinitz 311 R (photo credit: REUTERS/Ronen Zvulun)
Finance Minister Yuval Steinitz 311 R
(photo credit: REUTERS/Ronen Zvulun)
Value-added tax will increase to 17 percent from 16% on September 1, as the Knesset Finance Committee approved the measure by 11 votes to six on Wednesday.
The government introduced the VAT increase earlier this week as part of a series of austerity measures it hopes will raise NIS 14.15 billion next year and help achieve the new budget deficit target of 3%. The package includes a 1% income tax hike for above-average earners, 2% surtax for those whose income is over NIS 67,000 per month, and legislative amendments to allow for more tax collections from large corporations.
Finance Committee chairman Moshe Gafni (United Torah Judaism) said at Wednesday’s meeting that more measures would be necessary, but warned the government against making decisions without consulting his panel. On Tuesday, Finance Minister Yuval Steinitz (Likud) agreed to Gafni’s request to postpone the VAT hike from August 1.
“The Israeli economy has prospered for more than three years, but the storm is raging all around us,” Gafni told the committee. “We are a country that relies on exports, and there is a revenue shortfall resulting from the crisis in Europe. It is possible to do nothing, but that would put us in the same situation as many European countries.”
Labor chairwoman Shelly Yechimovich labeled the committee’s approval of the VAT hike a “mark of shame,” and said it demonstrated “complete surrender” to Prime Minister Binyamin Netanyahu’s failed policies.
“The VAT increase is an unethical and uneconomic act. It places the burden of refilling the great pit of state revenues on the middle class and the poorest, instead of on the fat pockets of the wealthiest thousandth of Israeli society, who continue to engorge alone from the fruits of growth,” Yechimovich said.
Steinitz told the committee that the government had a “duty to show the world that we are not Spain,” and that it was capable of taking action in the face of the forecast growth slowdown. Average growth in the euro bloc is negative, and the credit rating of almost every country on the Continent has been downgraded, he said, “but when a European country falls, it has a safety cushion.... We don’t have a safety cushion.”
The finance minister said the general public would contribute around NIS 7.5b. to state coffers under the austerity package, while the remaining NIS 6.5b. would come “from the wealthy only.” He added that the government was going even further than the recommendations of the Trajtenberg Committee on Socioeconomic Change by lowering the 2% wealth tax threshold from NIS 80,000 per month to NIS 67,000.
Bank of Israel Governor Stanley Fischer also presented a pessimistic picture of the global economy, saying the most worrying thing was the high Spanish and Italian bond yields, which would make it difficult for those governments to finance expenditures.
Fischer pointed out that Israel’s economy had grown faster than those of other developed countries in every quarter since 2008, and said the current slowdown was a result mainly of lower demand for exports caused by a weakened global economy. He noted that unemployment was now 7%.
The governor said there were two possible scenarios: Either Europe would deal with its crisis, or some countries would leave the euro bloc. Nobody knows what the consequences will be if the second scenario unfolds, he said, “but we must be prepared for every possible event and deal with the situation in advance, not afterward.”
Also on Wednesday, the Federation of Israeli Chambers of Commerce slammed the austerity package, with president Uriel Lynn warning it would hurt salaried workers and businesses alike.
Lynn emphasized that the VAT increase would be imposed on businesses not long after the corporate tax increased by 1 percentage point, to 25%, and dividends tax increased by 5 percentage points, to 30%.
Once again, the wealthiest companies would not be made to share the burden, he said, and would continue to benefit from over-the-top tax benefits under the Encouragement of Capital Investments Law.
Meanwhile, Shas chairman Eli Yishai announced that he had persuaded Steinitz to restore NIS 60 million in spending cuts to the Shas-controlled Interior and Construction and Housing ministries.
Yishai said the money would be used to help cashstrapped local authorities and fund public housing.
“Local authorities in Israel and thousands of poor people who need housing were saved today from a sharp cut because of our uncompromising stance on their behalf,” Yishai said.