Is the government’s cost of living plan any good? - analysis

Prime Minister Bennett held a joint press conference to explain his plan to reduce the cost of living in Israel, with experts weighing in on the potential of the plan to address rising prices.

  Prime Minister Naftali Bennett in the Knesset plenum, February 7, 2022. (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
Prime Minister Naftali Bennett in the Knesset plenum, February 7, 2022.
(photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)

Experts have been weighing in since Wednesday on the potential viability of the government plan to reduce the cost of living in Israel, and whether it will properly address the issue of rising living costs.

The plan, as explained by Prime Minister Naftali Bennett, includes:

• An income tax credit for working parents• Reduction (and in some cases, abolition) of tariffs on a slew of products including food, furniture, toiletries, medical equipment and construction materials• A one-time increase of 20% in the negative income tax for low-wage workers eligible to receive it• An average 2.4% reduction in electricity tariffs• An increased subsidy for after-school care for children from three to eight years old in lower-middle-class towns•And the establishment of a committee to reduce monopolistic activity and increase competition in the food market

“This plan primarily varies from earlier ones in its emphasis on providing assistance, provided people are working, rather than previous helicopter approaches of showering money on everyone, which actually acted as an inducement not to work,” said Prof. Dan Ben-David, head of the Shoresh Institution for Socioeconomic Research and economist at Tel-Aviv University. “In a country perennially facing high rates of nonparticipation in the labor force, especially among certain population groups, this is a welcome change.”

Ben-David explained how the measures seem to be pushing the Israeli public toward increased workforce participation.

“The fact that they are adding [tax credits] not only for the mother but also for the father means that both have to be employed in order to fully reap the benefits,” he said. “The improvement in Israel’s ‘negative income tax’ provides more assistance to people working at low wages. Since the subsidy is a fixed proportion of the wage, it acts as an incentive for people to try to work more so that their subsidy will increase, up to a certain ceiling.”

 INTERIOR MINISTER Ayelet Shaked, Finance Minister Avigdor Liberman and Construction and Housing Minister,  Ministerial Liaison to the Knesset, Jerusalem Affairs and Heritage Minister Ze'ev Elkin at a meeting discussing the Economic Arrangements Law, October 31, 2021 (credit: MARC ISRAEL SELLEM/THE JERUSALEM POST) INTERIOR MINISTER Ayelet Shaked, Finance Minister Avigdor Liberman and Construction and Housing Minister, Ministerial Liaison to the Knesset, Jerusalem Affairs and Heritage Minister Ze'ev Elkin at a meeting discussing the Economic Arrangements Law, October 31, 2021 (credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)

Ben-David noted that “the details of the plan are skimpy,” as it is yet unclear exactly how the measures being taken will affect the national debt or the government deficit. He also noted that it represents a missed opportunity to address Israel’s workforce education.

“The primary problem with the important emphasis on encouraging people to work is that a huge number of Israelis are very poorly educated and lack important skills necessary to work in a modern, global economy,” he said. “That’s a major reason why Israeli prices are so high in the first place.”

According to the OECD price level index, Israel is one of the four most-expensive countries in the world regarding general pricing. This plays a substantial role in the difficulty Israelis face coping with what is a low inflation rate, relative to other countries: the Start-Up Nation endured a 2.8% rise, drastically overshadowed by many other countries such as the US (7%), Russia (8.3%) and Brazil (10%).

Ben-David suggested that Israel getting its education system up to snuff should be a huge focus of government effort.

“Our education system is the worst in the developed world and needs to be completely overhauled, while the adults that we are currently trying to induce to work need to also be provided the requisite skills and conditions to do so.”Prof. Karnit Flug, vice president of the Israel Democracy Institute and the former governor of the Bank of Israel, agrees.

“Generally, our education system does not prepare its graduates sufficiently for the current labor market,” she said.Flug explained that Israel’s vocational training scores are both low and varied widely. The country had a similar large variance in international tests measuring literacy, numeracy and the ability to function in the digital world.

She touched on another point of Ben-David’s, that Israeli workforce participation is dragging.

“Our problem in terms of the labor market is not only that there are large populations that have very low rates of participation, but also that large parts of the population that do participate in the labor market are not equipped with the adequate skill to be very productive,” said Flug.

Putting aside the government’s lack of focus on the educational system, Flug had more direct criticisms of the aid plan, namely its tax-credit system.

“In terms of costs, this is about half of the cost of this program, two billion shekels,” she said. “It’s costly for the budget. It will require either additional tax measures somewhere else or a cut in other expenditures, and it will benefit only those who actually pay taxes. Because the income tax in Israel is very progressive, about 55% of employees don’t actually get to the threshold, and they don’t pay income taxes, so it will benefit the upper-income brackets. It’s actually going to the maybe 40% or 45% of people who are higher wage earners.”

Despite this, noted Flug, the plan’s attention to lower-income residents is reassuring.

“It’s a step in the right direction,” she said, referring to the negative income tax boost leveled at low-income workers.

“It focuses on those who were the most affected by the increase in prices and in the cost of living – by the way, the cost of that part is about 250 million shekels. So in terms of costs, it’s much more modest than the income tax credit points.”

The expansion of subsidies for after-school programs in lower-middle-class towns, as well as the reduction in the price of electricity, are also constructive steps, said Flug.

So long as room can be found within the government’s already tight budget, the plan stands to both encourage workforce participation and give much-needed aid to lower-income families. Whether this will impact the core issue of Israel’s historically high prices remains to be seen.

“These parts of the program are moving in the right direction, but their benefits will be seen over time,” said Flug. “It’s not instantaneous.”