Kahlon touts budget reforms amid criticism on spending

Prime Minister Benjamin Netanyahu praised the unanimously-approved budget, calling it "an important budget with foundations for competition, reforms and growth."

Moshe Kahlon (photo credit: MARC ISRAEL SELLEM)
Moshe Kahlon
(photo credit: MARC ISRAEL SELLEM)
Finance Minister Moshe Kahlon sought to highlight structural reforms in his 2017-2018 draft budget, which garnered approval from the government following an all-night session Thursday night, even as critics pounded him for spending and bowing to political coalition demands.
"We have a strong and growing economy. Upcoming budget contains significant growth engines and increases social budgets by billions. We will continue to lead the Israeli economy responsibly and judiciously," Kahlon said, touting the budget that would increase the drug basket by 200 million, build 17,000 new classrooms and reduce the corporate tax rate.
Prime Minister Benjamin Netanyahu praised the unaniously-approved budget, calling it "an important budget with foundations for competition, reforms and growth, a lower cost of living and reducing the gaps, which is an important goal of ours."
The two-year budget plan blew past spending limits, setting NIS 359.7 billion for 2017 (a 5.2% real increase from 2016), and NIS 376.7b in 2018 (an 8.3$ real increase from 2016). The Bank of Israel criticized it for setting up a bigger hole for 2019, relying on rosy predictions, and predicted that it would deepen Israel's debt burden.
But beside the fiscal debate, Kahlon highlighted the laundry list of changes he hopes will help get Israel's economy running more smoothly.
To tackle high prices, Kahlon is aiming to reform the Standards Institute, trying to align its product regulations with international standards to make it easier for Israel to import competing products. The reforms specifically targets the markets for electronic appliance, the liquid gas used in heating and cooking, the communications market, and the toiletries market.
In transport, it laid out new rules to allow carpool ride-sharing services, and investments for light rails in Tel Aviv, Jersualem and a new line from Nazareth to Haifa.
The budget included Kahlon's plan shake up credit cards and banks, and regulate person-person lending.
In housing, Kahlon's plans included setting infrastructure fees nationally (instead of locally) to boost development, the creation of an inter-ministerial body to coordinate regulatory activity on housing. It would also impose a tax on people who own three or more apartments.
The budget added NIS 155m for informal education, would pass plans to give schools more autonomy, and giving new benefits for independent workers, making it easier for them to get unemployment benefits. It would also cutting back some tax benefits on the highest corporate earners.
It would remove some of the steps needed to open business and registering property, two areas that have dragged Israel down in the World Bank's ease of doing business index.
But in addition to the reforms, the budget also tackled taxes in an attempt to boost spending and invite international business.
On the one hand, it would widen existing income tax brackets in order to put more of the tax burden on the wealthy, and added taxes on kibbutzim
On the other, it would slash corporate tax rates from their current 25% to 24% in 2017 and 23% in 2018. Kahlon already lowered the rate from the 26% level where it stood when he took office.
He also included a sweet deal to attract high-tech companies. Those with revenues over NIS 10 billion would only have to pay a 6% corporate tax on intellectual property. Smaller companies would be taxed at 12%. Taxes on dividends paid to the parent company (but not private shareholders) on Intellectual Property would fall to just 4%.  Those rates would apply only to  companies develop intellectual property in Israel. The plan also includes steps to close some corporate loopholes.
Coalition partners were quick to point out what they had gained for their constituents in the budget.
Yisrael Beytenu, for example, put out a statement crowing about NIS 1.9 billion that would be devoted to pensions that were previously uncovered, while UTJ's Arye Deri praised over NIS 4 billion in spending on municipal grants, health and social programs.
The opposition, however, saw the budget as the result of misplaced priorities, which managed to grant large corporate tax breaks while cutting many budgets and still managing and increase the size of the overall spending and deficit. The budget, critics said, was a capitulation to coalition parties and their interests.
"The new state budget looks a national plan to widen gaps, deepen poverty and continue the deterioration of Israeli agriculture and industry," said opposition leader MK Isaac Herzog (Zionist Union). 
Meretz leader MK Zehava Galon said Kahlon was managing the budget like a Turkish Bazaar.
"One hand is cutting billions across-the-board from the government, while the other hand is giving extra budget to ministries depending on how loud the ministers shout," she said.
Yesh Atid said the plan was corrupt and irresponsible.
"This is a government that takes the money from its citizens and distributes it first among itself through wasteful coalition agreements, which once again leads our nation to a deficit hole that our children will pay for," a party statement said.
Zionist Union MK Amir Peretz hit the budget as serving coalition partners without proper investments in growth, accusing Kahlon of trying to score points on international  ratings with his housing plans instead of helping families weighted down by mortgages.
"The bottom line is that it increases the budget deficit without presenting a vision," he said
Zionist Union MK Shelly Yacimovich said she agreed with the tax on third apartments but little else.
"Meaningless tax reductions and temporary distribution of the plunder will immediately be deducted from a wide-spread base in the budget, and again critically damage the basic services that Israel's citizens are entitled to by law," she said.