Tax authority to cover nearly NIS 1.5b in Gaza war damages

Alongside a slight increase in the 2014 deficit, Finance Minister hopes to keep the costs of the war from spilling over into 2015.

Finance Minister Yair Lapid. (photo credit: REUTERS)
Finance Minister Yair Lapid.
(photo credit: REUTERS)
The Israel Tax Authority, which assesses and pays out compensation for direct and indirect damages resulting from Hamas rocket fire during Operation Protective Edge, will pay out roughly NIS 1.5 billion in damages.
The authority estimates that it will pay out NIS 1b. in indirect damages – those resulting from lost business, lost wages and security spending within 40 km.
of Gaza – and has already paid out NIS 23.6 million in direct damages from rocket fire.
This figure represents 55 percent of the 3,670 claims filed so far, which implies a roughly NIS 43m. price tag in direct damages, though more claims could come in.
Though direct damage compensations draw on an emergency fund within the tax authority, the war has also had clear implications for both changes in the current budget and plans for the 2015 budget.
Finance Minister Yair Lapid on Tuesday decided to cut 2% from all ministries, save defense, through the end of the year, in order to pay NIS 1.5b. in costs associated with the war.
Alongside a slight increase in the 2014 deficit, Lapid hoped to keep the costs of the war from spilling over into 2015.
The economic slowdown resulting from the war will mean lower revenues, however, which alongside the defense ministry’s request for higher budgets and Lapid’s insistence that he will not raise taxes, will make it difficult to keep the budget framework for 2015.
The government seemed set to approve a NIS 500m.
plan to help the Gaza communities recover from the war as well.
On Wednesday, the Bank of Israel published its positions on how to handle the budget, taking several swipes at Lapid’s positions in the process.
While conceding that it would be alright to raise the deficit from 2.5% of GDP to 3% for one-time expenditures, BoI warned that recurring, structural increases would be harmful for Israel in the long run, preventing it from lowing its debt burden and thus forcing it to pay more in the future. Those later payments would eventually require further spending cuts or tax increases.
Just based on already-promised spending and expected revenues, the deficit would be 3.5%, or even 4% if there were unexpected new costs. NIS 4.5b.
in budget cuts would be necessary just to keep the budget in line with its legal spending limits.
This figure did not include plans to add NIS 1.6b. for infrastructure such as a Tel Aviv light rail, or NIS 1b.
for education. Israel already spends less than its peers on its civil services, so cuts were not the right way forward, the bank argued.
In a swipe at Lapid, the bank fingered two of his policies that it said exacerbated the situation: the decision to cancel planned income tax increases for 2014, and the 0% VAT housing policy, which will cost between NIS 2b. and NIS 3b. a year. Lapid argues that increasing taxes will burden people’s pocketbooks and reduce consumption.
Economists disagree on which combination of cuts, tax hikes, and deficit increases would suit the country best.
“The best is to raise the deficit even more, even if the debt grows a little, it’s OK, as long as they show that it’s temporary and have a plan for how to lower it,” argued Ori Greenfeld of Psagot Investment House.
In his estimation, third-quarter growth will be negative as a result of the war, but will bounce back in the end of the year as tourism starts to recover, and people start spending again, particularly on durable goods. A recovery in Europe and the US, Israel’s big trading partners, would also give Israel a bounce.
Though precise figures for how the war affected economic growth, and thus revenues, were not yet available, Greenfeld estimated that it could reduce GDP growth by about 0.5%.