Lapid justifies taxes, cuts in budget

FinMin concedes draft budget a blow to middle class, but necessary measure to prevent economic collapse.

Lapid Eini press conference 370 (photo credit: Finance Ministry spokesman)
Lapid Eini press conference 370
(photo credit: Finance Ministry spokesman)
Finance Minister Yair Lapid conceded on Wednesday that the bevy of taxes and cuts in his budget proposal were a blow to the middle class and the working man he made the center of his campaign, but maintained he has no choice if he wants to prevent the “collapse” of the economy.
“I think there’s something legitimate in the anger directed toward me – we’re hurting people in their pockets,” he said in Jerusalem, at his first press conference since releasing the draft 2013-14 state budget.
“I’m also upset by the situation,” he continued. “I wish I could stand here and say what goodies I was giving out to the nation,” but “I’m not willing to get to the situation of Greece.”
The budget, which the cabinet will discuss on Monday, increases value-added tax (starting next month) from 17% to 18%; corporate tax from 25% to 26% (in 2014); and income tax across the board by 1.5 percentage points (in 2014).
“Responsibility means sometimes doing the unpopular thing because it’s the right thing to do,” Lapid said.
“Everyone wants to fill the deficit, but everyone wants someone else to pay for it.”
He said that by also taxing the rich, corporations and luxury goods, he had kept his campaign promises, and that his budget had more “distributive justice” than previous ones.
Even if things are tough now, he argued, the government’s effort to bring down the cost of living and reform the economy will make everyone better off down the line.
Standing next to Lapid at Wednesday’s press conference was a somewhat defeated-looking Ofer Eini, chairman of the Histadrut labor federation. The finance minister said secret negotiations between the two men had resulted in NIS 1.5 billion in budget cuts and prevented a strike that would cost the economy NIS 2b. a day.
“Even the workers understood they needed to take part in these cuts,” Lapid said, though he noted that discussions on nurses’ and doctors’ salaries, ports and the Israel Electric Corporation were ongoing. “We prevented an unnecessary war in a tough period.”
Eini, who called the negotiations among the toughest he’d participated in, said he understood “that we also have to bear the burden” because “Israel is in an economic crisis, of that there’s no doubt.”
He did not, however, walk away from the table emptyhanded.
Eini convinced Lapid to maintain the agreement for contract workers, and increase both pension contributions and the minimum wages for them starting in July. He secured a 1 percentage point increase in the level of state contributions for public sector pensions (from 19.5 percent to 20.5%) as of July 2015.
Though wage increases were frozen for a year, social benefits would still be calculated as though they had increased.
Tax-free education funds (kranot hishtalmut), an expensive budgetary sticking point that outside experts often cite as wasteful, will be expanded to cover university and college students in 2014, allowing those who work in the public sector to begin contributions from their first day of work. Employers will contribute 7.5% of pay to the students’ 2.5%.
Eini also agreed to postpone wage negotiations for a year, until the summer of 2014.
He said that there was agreement on most of the substantial reforms for the Israel Electric Corporation that he called “so, so important for the economy,” but added, in a challenge to Lapid, “There hasn’t been anyone in the government who’s been able to advance it.”
Meretz leader Zehava Gal-On blasted both men on Wednesday, saying “Lapid’s program will annihilate the working man” and that “Ofer Eini sold Lapid industrial quiet at the expense of the weak workers.”
A Shiluv poll broadcast on Channel 2 found that 50% of respondents consider Lapid’s appointment as finance minister a mistake, while only 28% believe he was the right choice.
Among Yesh Atid voters, 28% said they would not vote for the party again, while 47% said they would.
Turning to the Law for the Encouragement of Capital Investment, which a recent report revealed led to four companies receiving 70% of all tax breaks and paying virtually no taxes, Lapid said an orderly process was necessary and that the law could not be changed retroactively.
“The law that allows the companies to take all the breaks is not a good one,” he said, but if Israel starts reneging on legal agreements, companies would not want to do business in Israel and “there won’t be another Intel.”
Though markets generally shrugged off the budget proposal, some analysts warned that it would hit the economy hard.
“In our opinion, the policy the Treasury expressed in the economic program doesn’t encourage growth, and will lead us to lower our growth forecasts for the economy for 2014 should it be put in effect,” said Ofer Klein, head of the economic and research division of Harel Insurance and Finance.
The main reason was that higher income tax and VAT and reduced benefits all lead people to spend less, and private consumption comprises 60% of GDP in Israel, Klein said. But, he says, there are two sides to every story.
“It’s also clear to us that an additional sin of the deficit target can lead to a downgrade in Israel’s credit rating, so action is needed. In our opinion, if the Finance Ministry will commit to reducing the tax levels to their prior limit in a reasonable period of time, and the public will believe them, it will be possible to limit the damage to the private consumption and growth to a minimum,” he said.
Gil Hoffman contributed to this report.