Yair Lapid offers 2% VAT cut instead of billions in Israeli coalition funds

The purpose of Yair Lapid's conference was to present guidelines for an alternative 2023-2024 Israeli budget, days before the government's budget proposal.

 The Knesset Finance Committee, led by Moshe Gafni, is seen debating the City Tax Fund, in Jerusalem, on May 15, 2023. (photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
The Knesset Finance Committee, led by Moshe Gafni, is seen debating the City Tax Fund, in Jerusalem, on May 15, 2023.

Instead of handing out an unprecedented NIS 13.6 billion in coalition funds, the government should invest in lowering the high cost of living by lowering Israel’s Value Added Tax (VAT) by 2%, opposition leader MK Yair Lapid charged in a press conference in Tel Aviv yesterday.

The purpose of the conference was to present guidelines for an alternative 2023-2024 budget, days before the government’s budget proposal, which was “full of holes” and “zero vision,” Lapid said.

The VAT drop would cost NIS 8b. The government should invest the remaining approximately NIS 6b. currently earmarked for coalition funds in growth engines, such as raising human capital for hi-tech and education, the opposition leader said.

Contributing to Israel's national budget

Coalition funds are a part of the national budget intended to fulfill political agreements that have budgetary significance. These are not part of the official budget of any government ministry. Unlike the rest of the budget, these funds are flexible and can be redirected with relative ease, as they require a cabinet decision and approval by the Knesset Finance Committee, but not an amendment to the actual Budget Law.

While Lapid did not deny the fact that his government, along with former prime minister Naftali Bennett, spent approximately NIS 2b. on coalition funds throughout 2021-2022, this did not exceed the average in the recent decade of approximately NIS 1b. per year. The coalition funds in the current budget will be over five times as high.More importantly, Lapid said, was the difference in the purpose of the coalition funds – approximately NIS 3.7b. of the funds in the current budget will go to haredi educational institutions that do not include professional training, Lapid said.

 Illustrative image of doing taxes. (credit: PXHERE) Illustrative image of doing taxes. (credit: PXHERE)

Israel is the only country he knew of that paid its citizens so that they do not have to work, Lapid charged. He stressed that he respected the world of Torah and religious study, but argued that the current funds do not give young haredi men the opportunity to enter the workforce with a respectable job if they want to. The coalition funds also include hundreds of millions of shekels for “messianic initiatives” proposed by ultra-conservative ministers and Knesset members, Lapid claimed.

“A budget that intends to grow the economy needs to include training for hi-tech, incentives for the periphery, core studies in the haredi sector so that they have a tool set with which they can join the workforce and international trade agreements… all of this does not appear in the budget,” the opposition leader charged.

Meanwhile, the Knesset Finance Committee approved the 2023-2024 budget laws on Tuesday afternoon after a marathon voting session that began on Monday night, and the two laws are now set for their second and third reading in the plenum, which are to continue throughout next week.

According to Israeli law, the budget must pass by May 29 at midnight. If not, the Knesset disperses automatically and the country heads to another election.

The budget laws and a number of accompanying laws are expected to pass on time, and after days of stormy debate that included shouting matches and even the physical removal of a Knesset member, the Finance Committee approved the controversial Municipal Tax (Arnona) Fund, which sparked a strike among dozens of municipalities that is expected to continue through Thursday.

The Fund functions as a mechanism to redistribute wealth among the local authorities, so as to incentivize them to earmark more land for housing and less for commercial purposes, with the long-term goal of lowering housing prices. The Federation of Local Authorities in Israel (FLA) claims that the Fund penalizes well-run municipalities by taking a chunk of their earnings, and could even lead to the financial collapse of some municipalities.

The Labor Party said that it intends to challenge the Fund in the High Court of Justice, claiming it discriminates against Israeli-Arab municipalities that suffer from insufficient urban planning.

The Finance Committee will reconvene on Wednesday to approve a final version of the coalition funds, which are intended to budget political agreements. The coalition funds add up to over NIS 13.6 billion for the 2023-2024 period, over six times the coalition funds spent by the previous government during the 2021-2022 period.

 Approximately NIS 3.7 billion of the fund is earmarked for private or semi-private haredi schools or religious study academies (yeshivot) that are not required to teach core subjects such as English or mathematics.

Both KAN and Channel 12 reported on Tuesday evening that the hassidic faction Agudat Yisrael, one of two factions that make up part of United Torah Judaism, demanded an additional NIS 627 million in coalition funds. The Finance Ministry said that it did not intend to reopen the coalition agreements.

According to KAN, Agudat Yisrael threatened that if they did not receive the funding, they would not give up their demand to pass an updated haredi conscription bill by the time the budget passes on May 29 – a demand that is not realistic.

A number of organizations organized a march scheduled for Wednesday evening from the Ayalon Mall to Bnei Brak, to protest what they called “the looting of the public coffer and passing nearly NIS 14 billion for coalition needs and political bribes.”

Meanwhile, negotiating teams representing the coalition and the opposition parties Yesh Atid and National Unity convened on Tuesday, contrary to reports that the talks had been temporarily frozen due to the ongoing budget legislation in the Knesset.

According to Ma’ariv, the teams met for six hours, and heard a lecture by Dr. Micha Goodman that addressed the “anxiety and concern in both camps,” as well as attended a joint meeting with President Isaac Herzog. He implored the sides to reach agreements as soon as possible and ignore growing criticism – both from protest organizations against the reform and Knesset members who support the reform – that the talks were dragging on unnecessarily and that there was no real interest to reach agreements.

KAN reported on Monday evening that, just before the 2021-2022 budget passed in the Knesset, Lapid, Bennett and former finance minister MK Avigdor Liberman secretly offered two haredi Knesset members over NIS 1b. in funding, in exchange for them voting in favor of the budget. These funds included budgeting private haredi schools that do not teach core studies, similar to what the current coalition is doing, according to the report.

Lapid and Liberman denied the report. Lapid said during the press conference on Tuesday that he did not know of any such proposal, and that the fact that the two haredi MKs voted against the budget and were not part of the government showed that the issue was not plausible, even as a “statement” against the then-opposition.

Finance Ministry Chief Economist Shira Greenberg published later on Tuesday an updated macro-economic forecast, which showed a drop in expected GDP growth and state revenues. The government’s proposed 2023-2024 budget was fashioned based on the previous forecast, which predicted approximately NIS 16.2b. higher state revenues than the current forecast.

This means that the government will likely create a larger fiscal deficit than previously expected – between 1.1% -1.35%, according to the forecast, as opposed to the previous 0.8%-0.9%.

The forecast takes into account the uncertainty surrounding the government’s proposed judicial reforms, but expects that the reforms will not pass in their original form. It also notes global economic slowdown as a factor that affected the change in forecast.