Budget by a thousand cuts:
Finance Minister Yair Lapid
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Photo credit: Gideon Markowitz |
Finance Minister Yair Lapid presented the
government with his ministry's final budget proposal for 2013-2014,
outlining aggressive cuts and a series of new taxes meant to help cover
some of the state's 39 billion shekel ($11 billion) deficit.
The bill cuts 25 billion shekels ($7 billion)
from government spending in 2013-2014: 7 billion shekels ($2 billion)
this year and 18 billion shekels ($5 billion) in 2014.
Some 4 billion shekels ($1 billion) will be
cut from defense spending and 2 billion shekels ($560 million) from
education and transportation over the two years. Additional cuts, yet to
be determined, will be made from the welfare and health budgets.
As part of Lapid's deal with Histadrut labor
federation Chairman Ofer Eini, negotiated to avoid a general strike that
could potentially shut the Israeli economy down, a 2 billion shekel cut
and wage freeze planned for the public sector will be revised. Finance
Ministry and Histadrut officials are still negotiating the final
agreement, which Lapid and Eini are expected to sign next week.
One of the biggest bones of contention in the
proposed budget bill is the Finance Ministry's plan for a 3 billion
($841 million) cut in child allowances and day care subsidies. The bill
proposes cutting child benefits from 175 shekels ($50) to 140 shekels
($39) per month per child.
Knesset members from all factions are expected
to oppose the child allowance cut vigorously. However, the Finance
Ministry has already prepared two compromises to help win it a favorable
vote: If the proposed child allowance cut meets what ministry sources
define as "mere opposition," the benefit will be cut to 150 shekels
($42) instead of 140 shekels. And if the cut meets fierce opposition
that might jeopardize the entire budget bill, the child benefit will be
set at 160 shekels ($45) per month.
"Every minister has already declared their
ministry a disaster zone, which is fine," Lapid said on Monday, adding
he was ready to "deal with whatever pressure is exerted on me."
'Series of new taxes unprecedented'
The budget bill also calls for an
unprecedented series of new taxes, which the Finance Ministry believes
will yield the state some 20 billion shekels ($562 million) in revenue
over the next 18 months.
Value added tax will increase from 17 to 18
percent as early as June, which will automatically drive up public
transportation prices, as well as the prices of most goods and services.
Despite raging opposition, the ministry also
plans to cancel various value added tax exemptions afforded to the
tourism industry, although it has yet to announce its final decision
about revoking the VAT exemptions given to the southern resort city of
Eilat, whose economy is almost completely dependent on tourism.
The Finance Ministry also plans to raise
income taxes by 1.5% from January 2014 for those earning more than 5,000
shekels ($1,400) a month, a move that is expected to cost the average
Israeli family an extra 3,000 shekels ($840) a year.
The ministry also plans a 0.5% rise in the health tax for high income earners.
Other taxes include revoking the health tax
exemption afforded to housewives; imposing a 20% tax on alcoholic
beverages and higher taxes on cigarettes; introducing a new, 25% land
betterment tax for individuals who own more than one apartment; and
imposing a 35% tax on pension plans for those earning over 15,000
shekels ($4,200) a month.
Lapid also decided to increase corporate
income tax by 1% to 26%, as well as impose a uniform 15% tax bracket for
all major corporations. However, companies that operate outside central
Israel will be excluded and will remain in their current, 10% tax
bracket.
An Israel Tax Authority report released on
Monday said that the scaled corporate tax employed by the Finance
Ministry in previous years, in an effort to encourage capital investment
in the private sector, resulted in a staggering 70% tax break for the
four largest corporations in Israel between 2003 and 2010.
The four companies, which were not named in
the report, paid only 3.3% in taxes, effectively receiving a 5.6 billion
shekel ($1.56 billion) tax break in 2010 alone. According to the
report, the state will lose nearly 10 billion shekels ($2.78 billion) in
2013 in a similar scheme.
"This is outrageous, but it's a law that was
passed by the Knesset and must be upheld. We will initiate a dialogue
with the major corporations and we'll see what can be done to change the
rules of the game," Lapid said.
"This is a 'no-choice' budget, but I believe
the public will understand what needs to be done [and will accept the
changes] as long as [they] see that we're treating their money with
respect."
'Time to change the system'
Speaking at a Calcalist financial conference
on Monday, Lapid said, "The middle class is not upset because it has to
pay taxes to support those who are less privileged. They are upset
because they feel, and justifiably so, that for many years their
hard-earned money has been snubbed; that instead of helping the weak,
those taxes funded certain sectors, irresponsible tycoons and
unnecessary government ministries. It's our job to change that and
create a just system.
"During the election, I kept asking, 'Where is
the money?' That was a rhetorical question, of course, since we know
where it money went -- it went to all the wrong places for all the wrong
reasons. Today, we're cutting things no one else dared touch, so now
the question is, 'What will we do with the money?' We plan to invest it
in the working public. It's their money and they should get it back."
Lapid also criticized "the tycoons, big unions
and certain sectors that are willing to do anything it takes not to be
taken for fools ... but have no problem making a fool of the middle
class. We will fight monopolies, aggressive debt reconstruction schemes
and excessive concentration of wealth in the economy, because these are
bad for the working public."
Lapid stressed Tuesday that the austerity
measures were short-term, saying, "This is what leadership and taking
responsibility are all about. We knew this was going to be hard and we
know people are angry, but we can't be blindsided by anger when the
other option spells the economy's collapse. "
He said that for the first time in years,
"we're making sure that the middle class is not the only one paying the
price -- this will affect sectors which until now were politically
immune."
"If we were to do nothing then the hole in the deficit would just grow bigger and social services would collapse," he said. "Every time you see TV reports about a country about to go bankrupt, you should know that it was brought about by spendthrift politicians who buckled under pressure. That is not going to happen on my watch. In two years, things are going to be completely different."
"If we were to do nothing then the hole in the deficit would just grow bigger and social services would collapse," he said. "Every time you see TV reports about a country about to go bankrupt, you should know that it was brought about by spendthrift politicians who buckled under pressure. That is not going to happen on my watch. In two years, things are going to be completely different."
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