Two-year budget will be passed in its current form

Economic plan aims to boost exports rather than local economic activity, finance minister tells The Jerusalem Post.

Yuval Steinitz 88 248 (photo credit: Ariel Jerozolimski)
Yuval Steinitz 88 248
(photo credit: Ariel Jerozolimski)
Finance Minister Yuval Steinitz is counting on the emergency of an economic crisis to help push the proposed two-year budget through swiftly in its current form despite the fierce opposition from some MKs to proposed tax hikes. "I have been a minister for 10 years and I have seen many finance ministers trying to pass the budget. Things are going well. The budget has been through the cabinet and was passed by the Knesset almost unanimously on its first reading," said Steinitz in an interview with The Jerusalem Post. Following that first reading last week, the 2009-2010 budget will have its second and third readings in July. "Everyone understands that we are at a time of an economic emergency. This is not the time to dwell over disagreements," said Steinitz. "I believe that despite opposition to certain parts of the budget it will be approved in its current form - including the imposition of value-added-tax on fruit and vegetables. There were even a few MKs who behind the scenes told me that they are in favor but they were skeptical if it will be passed." Opposition has mounted in recent months over the tax hikes, including the 1% increase in value-added-tax on goods and services to 16.5% from the current 15.5% and the imposition of VAT on fruit and vegetables. "We had to deal with a budget hole of NIS 70 billion which requires the adoption of these measures for a limited period of one and a half years to increase state revenues. On the other hand we are raising child care benefits for the good of families with four to five children, which is in turn expected to boost consumption and local demand," said Steinitz. "The VAT exemption on fruit and vegetables is unjustifiable, and benefits the rich. In the vast majority of countries in Europe VAT is levied on fruit and vegetables, at rates of up to 25%." Steinitz expects the first signs out of the crisis to show toward the end of 2009 as the rapid rise in unemployment slows down, and a return to effective growth toward the end of 2010. The Finance Ministry expects the economy to contract by 1% this year and return to growth of 1.5% in 2010. This forecast is less pessimistic than the Bank of Israel growth forecast of a contraction of 1.5% in 2009. "The 2009-2010 budget is both 'super-social' and 'super-economic.' The most important part is the economic efficiency plan, which is tailored to get the economy out of the crisis and fight unemployment, with the aim of putting a halt on the rapid increase by the end of 2009," said Steinitz. "It includes dramatic investment into hi-tech, infrastructure and research and development. The purpose is not to lose but try to maintain the country's competitive edge and its international position. Therefore we needed to expand the government's expenditure ceiling by 1.3% in both years. On the other hand, we are ensuring that the budget deficit ceiling, set at 6% of GDP for 2009 and 5.5% for 2010, will not be broken." Commenting on the impact of the global crisis, Steinitz emphasized that the local economy started to feel the pains of the crisis only as exports started to drop. "In Israel we did not have a real estate bubble, a financial crisis or a currency problem," said Steinitz. "The main trigger of the crisis in Israel is the dramatic drop in demand for exports, hi-tech, chemicals, and tourism. At the same time there is a decline in investments in hi-tech and other areas in which Israel excels." Steinitz added that Israel's economy did not require the implementation of an expansionary economic policy as was adopted in other countries like China or Japan. "At the beginning of the crisis, many said we should look at Barak Obama as an example and follow his policies. But I realized that we are not the US and we can't do what large countries do," said Steinitz. "We are an export-oriented country and we focus on innovation and manufacturing technology components. There is no benefit in trying to increase local demand for the products that we export because Israelis are not going to need to buy an individual Intel microchip. Israelis will not buy more products of NICE, Comverse or Checkpoint even if we encourage local demand." Instead, Steinitz pointed out that the economic efficiency plan is tailored to protect and boost exports and enable industry to overcome the crisis with minimum damage, while maintaining firms' competitive position by easing credit availability and foreign trade deals. "Israel needs to retain its competitive edge once the global economy recovers from the crisis," said Steinitz. One of the ways for Israel to stay competitive is to become one of the world's most attractive investment destinations by gradually implementing a tax cutting policy, according to Steinitz. At the end of April, Prime Minister Binyamin Netanyahu and Steinitz unveiled a multi-year tax reduction plan, which would gradually cut the maximum individual income taxes to 39 percent by 2016 from the current 46% and corporate taxes to 18% from 26%. In recent weeks, fierce opposition by economists and experts has been raised against the implementation of the plan, given the deep economic crisis and a record deficit. Bank of Israel Governor Stanley Fischer expressed dissatisfaction, while urging the government to delay the planned income tax cuts for the coming years. "The tax cutting plan is going ahead as planned and at this point I don't see a reason for any changes," said Steinitz. "Individual tax rates will start to fall gradually from 2010. Cutting corporate taxes will attract international companies like Intel to Israel as they are thinking about locating production plants in five years time." On Wednesday, Steinitz met in Paris with 40 of his counterparts from around the world during a meeting of the Organization for Economic Cooperation and Development. "We are at the top of the list of five countries who are on the roadmap for accession to OECD membership in terms of conforming to standards," said Steinitz. "We are making good progress and we expect membership by 2010."