A view from Israel: Overspending and undercutting

As reported by Globes, each 1% hike in VAT will enrich the government coffers by NIS 4 billion in revenues.

Gov't luxury cars (photo credit: REUTERS)
Gov't luxury cars
(photo credit: REUTERS)
Just when you thought you had a grip on your finances and control over your income and spending habits – or that you didn’t – the government has now announced its intention to raise value added tax (VAT) by 1 percent following a decision by Prime Minister Binyamin Netanyahu and Finance Minister Yuval Steinitz to bring the proposal to the cabinet on Monday.
As reported by Globes, each 1% hike in VAT will enrich the government coffers by NIS 4 billion in revenues. The cabinet will also be asked to make an across-the-board cut for government ministries totaling NIS 700 million.
What should be worrying to middle-class citizens is that government sources said the rise in VAT is only a first step decided upon by Netanyahu as part of a comprehensive plan to raise taxes.
The government deficit in 2013 is expected to reach NIS 58b. compared with the target of NIS 30b., and the government must formulate an overall plan of tax hikes and budget cuts to reach this target.
ON A state level, this sounds reasonable. After all, every country today must take extreme measures to avoid falling victim to the global economic crisis. And Israel has navigated that storm quite admirably so far.
But at a time when social protests are taking place, specifically against the high cost of living, it seems absurd that the government will now take the step to undercut the middle class.
Government spending is sky-high. It employs 30 ministers and nine deputy ministers. The fact that the Finance Ministry has recently purchased luxury vehicles (NIS 205,000 each) for its cabinet ministers sends entirely the wrong message and demonstrates extremely poor judgment.
As reported in this paper earlier this week, former Kadima leader Tzipi Livni responded to the announcement that Netanyahu would seek to raise VAT by saying that raising VAT as if there were no socioeconomic protest would harm the middle class and the weak.
“Instead of courageously changing his priorities, Netanyahu is letting Israel enter tough economic times with a bloated government with sectarian political priorities,” she said.
Labor Party chairwoman Shelly Yechimovich responded to the announcement by saying that the citizens of Israel will pay dearly for this.
According to Yechimovich, the prime minister is “disassembling and crushing the middle classes while creating dangerous gaps between the rich and the poor.”
SO HOW does Israel fare when compared to other countries? According to the OECD, “in Israel, the average person’s financial wealth is 47,750 USD per year, more than the OECD average of 36,238 USD.” This is not necessarily accurate, since the average household net-adjusted disposable income is lower than the OECD average of $22,387. Israelis earn $31,155 per year on average, lower than the OECD average of $34,033.
And with high defense expenditure at 6.8% of the GDP, according to the Stockholm International Peace Research Institute’s 2012 report, Israel spends less on its citizens than the OECD norm.
Given the (unnecessary) reality here and the fact that embarrassingly low salaries, low expendable income and high taxes are the norm, it is surprising that just a month ago at a press conference in Jerusalem with OECD Secretary General Angel Gurria, Netanyahu said that “Israel up to now has done better than most of the OECD countries because... we didn’t squeeze taxes sky-high because we realized we’d get more tax revenues from lower tax rates rather than the opposite.”
He continued, “Social justice cannot be attained if there is no growth. Growth occurs only if... you don’t tax the most productive bodies in a manner that makes it more worthwhile not to work – not worthwhile to work, not worthwhile to invest, not worthwhile to earn, and then the government doesn’t get taxes.”
Has the country’s economic situation changed so drastically in the last month that the government must place extra strain on middle- class families? Isn’t it tough enough already? Comedian George Carlin described economic and social classes this way: “The upper class keeps all of the money, pays none of the taxes.
The middle class pays all of the taxes, does all of the work. The poor are there just to scare the **** out of the middle class – keep them showing up at those jobs.”
The fact is, to reduce the strain on the middle class and create more revenue, the government needs to make more of an effort to discover new ways to accomplish this. It must continue breaking up monopolies such as the ports and the Israel Electric Corporation, to name two examples.
It can charge a higher tax on luxury vehicles and a lower tax on family cars. It can start charging VAT in Eilat. It can tackle the black market.
There must be numerous other ways to reduce the strain on middle-class families. Yesterday was the time to find and implement them.