The budget proposal that Finance Minister Yair Lapid submitted to the government
Monday night comprises an income tax increase of 1.5 percent starting in 2014
and boosts 2013 spending by 7% in real terms, the largest budget increase of any
Due to the forthcoming late passage of the budget, its draft
proposal, released Tuesday, took extraordinary measures to allow greater
spending and a large deficit in 2013. The draft indicated the “limited ability
of the government to make necessary adjustments to spending and revenue,” but
pegged 2014 as a year for the return to fiscal responsibility.
proposed 2013 budget, Lapid set the deficit limit at 4.65% of GDP, and stretched
the allowed growth over the previous year (NIS 9.5 billion) by an additional
one-time 2.2% splurge (NIS 6.5b), which alongside an increase in prices (NIS
3.8b.) would bring the overall budget to NIS 304.5b.
In real terms, that
growth amounts to a 7% increase over 2012, the highest in the country in the
past decade and among all OECD countries for this year.
Because that amount was still lower than originally
planned spending, however, the proposed budget also declared itself to contain
“the largest cuts in the country’s history.”
If the budget goes into
effect, value-added tax will increase by 17% to 18%, tax exemptions will be
reduced, the taxation mechanism for retirement savings will be simplified, new
taxes on cigarettes and alcohol will be implemented and a new housing tax will
be installed. Additionally, the defense budget will be cut by NIS
Reintroducing “fiscal restraint” with a 3% deficit in 2014, however,
will require further tax hikes and deeper cuts to planned spending.
proposed budget for 2014 will grow less than half as quickly at a rate of 3.35%
(not counting the one-time spending splurge), reaching NIS 307.9b.
taxes will increase by 1.5% across the board, bringing the highest rate to
49.5%, and corporate taxes will also increase 1% to 26%.
will be cut to NIS 140 per child per month until 2015, and the state will cease
to subsidize after-school care for children nine years of age and
Infrastructure projects will be deferred, and the planned rise in
the education budget will be reduced.
Five Israeli diplomatic missions
overseas will be closed and trips abroad by ministers will be cut
Several magistrate’s courts will also be closed.
In the long
run, the budget deficit must stay low enough to bring the nation’s overall debt
burden – which was 73.2% of GDP in 2012 – down to the European target of
“Without a consistent decline in debt to lower levels in the coming
years, the credibility of the government’s fiscal will be hurt.”
spending side, the budget will cut 1% of civil service staff and install a
hiring freeze until the end of 2015.
Salary payments (including
retirement) in 2012 comprised 27.3% of spending – 33.9% if indirect wages are
The proposed budget sets out plans to improve productivity in
the economy, increase competition and participation in the labor force, lower
the cost of living and make the public sector more efficient.
will have a chance to vote on the draft budget at its meeting next Monday, but
does not need to pass it until early June. The Knesset must then approve it by
August – otherwise new elections will be called.
Opposition leader Shelly
Yacimovich, who supported the higher deficits, said the proposed cuts were a
cruel betrayal of the public and an economic mistake. The Labor chairwoman
excoriated Lapid for increasing taxes after promising in his campaign that the
middle class “would no longer be the government’s ATM,” saying politicians
“always make it sound as though this time they really mean it, and then at the
moment of truth it turns out that the ones paying the bills are the Israeli
Uriel Lynn, president of the Federation of Israeli
Chambers of Commerce business lobby, said proposed changes to the law
encouraging capital investment “missed the point.”
revelation that the biggest companies paid an effective rate of about 3% due to
breaks, Lapid proposed raising minimum rates to 10% in the periphery and 15% in
“While the entire business sector will have to pay a
corporate tax of 26% and another 30% for withdrawing profits, the ones in the
capital investment encouragement law will pay half, and that is certainly not
fair toward the business sector,” said Lynn.
Taking to Facebook to defend
the proposed budget, Lapid wrote, “Yes. It’s hard. We knew it would be hard, but
it’s not the same thing when it actually arrives. It’s hard and people are
angry, but this is exactly what taking responsibility means: doing what’s hard
with the clear knowledge that people will be mad at you.”
alternative, he wrote, was allowing the economy to “collapse,” and allowing the
deficit to continue to grow.
“For the first time in years, the middle
class is not the only one paying the price. This time, we went to places that
nobody dared touch: corporate tax, luxury goods, the capital investment
encouragement law, to sectors and areas that until today were immune to
politics,” Lapid wrote.
Though the middle class will be hit in the short
run, he conceded, it is part of a long-term plan to improve their situation in
the long run.
The prices of cigarettes, cigars and tobacco products were
set to increase by 10% at midnight on Tuesday, after Lapid signed a special
decree on Tuesday night.
The finance minister decided that the minimum
tax on a packet of cigarettes will rise from NIS 12 to NIS 15, and from 75% to
90% on cigars.
The move was expected to put an additional NIS 800 million
into the state’s coffers.
The Knesset Finance Committee will have to
approve the price hikes retroactively in two months time; the decision will take
effect on Tuesday night.Jerusalem Post staff contributed to this report.
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