PM, Steinitz present economic rescue plan

Maximum individual taxes to fall to 39% by 2016; corporate taxes to drop to 18%.

Steinitz got milk 248 88 (photo credit: Ariel Jerozolimski)
Steinitz got milk 248 88
(photo credit: Ariel Jerozolimski)
Prime Minister Binyamin Netanyahu and Finance Minister Yuval Steinitz on Thursday disclosed the principles of a five-point economic rescue plan to halt unemployment, cut taxes and restore growth in the economy. "We are in a great crisis. The economy can be likened to a plane on a free fall, and we need to stop the fall while also implementing measures to boost the economy upward and return to growth once we emerge out of the crisis," Netanyahu said Thursday at a press conference in Jerusalem. "The principles of the plan we are presenting include measures that are intended to put a break on the repercussions of the global crisis on the local economy, to preserve jobs and jump-start the economy. We have succeeded in doing this before and we will succeed in doing this again." Presenting the economic plan for 2009-10, Steinitz said he hoped that within one or two years Israel would see signs of new growth. But he emphasized that the plan's outline was being presented only in broad terms since many of its details are still being worked on. "We are unveiling the principles of the plan to provide a general direction in a state of uncertainty and present the steps of the plan, which can be implemented with immediate effect without the approval of the state budget, such as easing the credit crisis," Steinitz said. The Histadrut Labor Federation, employer organizations and economists welcomed the intentions of the plan but expressed caution over its implementation and financing amid a growing deficit. "The real test of the government will be in the [plan's] implementation," Histadrut chairman Ofer Eini said. "Workers afraid of being fired and the public as a whole will be examining the seriousness and intentions of the government, and I hope the government will meet expectations." Israel Manufacturers Association president Shraga Brosh, chairman of the Economic Organizations, said the structure, content and significance of the principles presented would emerge in two or three weeks, once the plan's details are formulated together with the Histadrut. "In parts of the plan, there are details missing over how the measures will be implemented, where the necessary sources of financing will come from and planned timetables for realization," said Ori Greenfeld, a macro-economist at Clal Finance Investment House. The plan, dubbed "Brake and Boost," consists of five steps. The first step is aimed at solving the credit crisis to encourage exports and business activity. The second step focuses on preventing layoffs and creating employment. The government will provide NIS 20 billion in state loan guarantees, out of which NIS 12b. will be to banks in an effort to increase lending, NIS 2b. to the nonbanking sector and a NIS 6b. aid package to exporters. "The expansion of state guarantees to the banks will take effect from next week, and I call upon the banks to raise capital and expand credit frameworks to the economy," Steinitz said. Some economists raised doubts whether the credit-easing measures would solve the credit crisis. "Braking measures are important, but since the credit crisis is a result of what is happening on the global markets, and in particular in the US, it will be difficult for the Finance Ministry to change the rules of the game in the Israeli credit market," said Ron Eichel, chief economic strategist at Meitav Investment House. "The expansion of credit sources into the economy and provision of state guarantees, if implemented immediately, might help to ease the difficulties within the local credit market, but it will not remove them completely." To halt the wave of layoffs and encourage employment, the government will embark on a fight against foreign workers by endorsing harsher fines against employers, apply the "Light to Employment" program and the negative income-tax policy, and expand job-training programs at an additional investment of NIS 1b. In addition, a NIS 1b. fund will be set up for the assistance of factories on the brink of collapse. Steinitz said the first two steps were the braking measures to halt the impact of the global crisis on the economy. The second part of the plan, the "boosting" measures, consists of three steps: structural reforms at the Israel Lands Administration, the electricity market and the ports; a long-term tax-cutting policy; and investment into physical infrastructures and human capital. "We need to remove bureaucratic obstacles and develop strong engines of growth to boost competition, which in turn will help to create hundreds of thousands of jobs," Netanyahu said. "At the end of the day, the competitive stance of the Israeli market will determine our economic situation." Netanyahu said by 2016 the maximum tax rate for individuals would be gradually cut to 39 percent from 46% today, and the company tax rate would be gradually reduced to 18% from 26%. "Individual tax rates will start to fall modestly in 2010, and company tax rates will begin to ease modestly this year," he said. "Our aim is to devise a plan where we can expand in a shrinking market by being more attractive to investors and thereby encourage the inflow of capital into the market and exports. Our economic policy is to quickly take market share." Greenfeld said due to the dramatic plunge in the collection of tax revenues amid the crisis, the government had no other choice but to institute insignificant tax cuts over the next two years and more significant cuts once the economy returns to growth.