Bank of Israel backs treasury on tax breaks, benefits plan

Measures proposed by Finance Minister Kahlon are appropriate and in line with policies, central bank says

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Finance Minister Moshe Kahlon (right) with Bank of Israel Governor Karnit Flug, June 3, 2015. (Yonatan Sindel/Flash90)
Finance Minister Moshe Kahlon (right) with Bank of Israel Governor Karnit Flug, June 3, 2015. (Yonatan Sindel/Flash90)

The Bank of Israel on Thursday backed a package of tax breaks and benefits Finance Minister Moshe Kahlon announced earlier this week, saying the measures were “appropriate,” addressed structural problems and were in line with the policies of the central bank and the government.

“Most of them integrate well into the government’s strategy to encourage employment, reduce poverty among working people, and assist young working families, and they are in line with the Bank of Israel’s policy recommendations,” the central bank said in a statement. “As they are measures that respond to structural problems, and are not coming to serve a transitory need to stimulate economic activity that is robust in any case, it is important that the measures be permanent.”

The governor of the Bank of Israel Karnit Flug has recently voiced criticism of the government for promising to use surplus tax revenues to cut taxes for citizens instead of investing the sums in improving education and infrastructure.

The package of tax breaks and benefits announced by Kahlon on Tuesday is aimed at increasing the net income of poor and middle-class working families by thousands of shekels a year. The NIS 4 billion a year ($1.1 billion) plan includes subsidies for after-school education, additional tax credits for working parents of children up to age 6, higher income supplements for low-income earners, equalization of tax credits for working fathers and mothers, and tax cuts on children’s clothes, shoes and cellphones.

Netanyahu did not offer immediate endorsement

But while the plan has won widespread praise, Netanyahu did not offer any immediate endorsement. On Tuesday evening, sources close to the prime minister said that the initiative “was in the right direction and will be approached positively,” but he gave no direct praise.

Though the proposal would constitute the government’s largest welfare package to date, the prime minister had not been briefed ahead of time nor invited to the press conference where Kahlon presented the plan.

Kahlon on Tuesday said the treasury had amassed a surplus of NIS 1.6 billion ($436 million) during the first quarter of 2017 and that forecasts were for an extra NIS 3 billion ($817 million) in government income for 2017 and NIS 3.5 billion ($953 million) more in 2018. The figures did not include the expected windfall in taxes following Intel’s decision in March to buy the Israeli car technology company Mobileye for an unprecedented $15.3 billion.

On Thursday, the Bank of Israel said it was still difficult to assess the cost of Kahlon’s announced measures, as some of them were not completely detailed and had different start dates, lengths, and approval processes.

“Given these limitations, the cost assessments published by the Finance Ministry are in line with the assessments of the Bank of Israel. The plan utilizes a significant portion of the reserve for special needs set aside in the 2018 budget within the framework of the two-year budget.”

Assuming the measures will be permanent, as is desirable, additional funding sources for the plan will need to be found to ensure the government’s ability to meet its fiscal targets for 2019-20, the statement said.

The central bank said that even in light of the proposed steps, it was important that government implement added policies that will lead to “improving the economy’s human and physical capital infrastructures, thus increasing the economy’s long-term growth potential.”

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