Netanyahu to raise taxes, cut budgets to avert slide into economic crisis

Prime Minister Benjamin Netanyahu said Tuesday that the government will have to raise taxes to avert economic trouble, and will do so by next Wednesday, August 1.

The prime minister’s plan includes a hike in VAT, which is sure to cause friction with protesters already concerned about economic inequalities in Israel.

VAT (value-added tax), Netanyahu said, will be increased by one percentage point, from 16% to 17%. Each 1-percentage-point hike in VAT will bring a revenue of NIS 4 billion, financial news outlet Globes estimated.

The cabinet will also look into making an across-the board cut of NIS 700 million from government ministries, as well as increasing taxes on cigarettes.

Netanyahu and Finance Minister Yuval Steinitz are set to bring the proposal to the cabinet early next week.

“There are no free lunches,” said Netanyahu, adding that Israel cannot shield itself, at least not entirely, from the world’s fiscal crisis. The steps, recommended by the Finance Ministry, would help prevent Israel from slipping into a financial crisis, much like Spain and Greece have.

Referring to European economies on the verge of bankruptcy, Netanyahu said: “This [bankruptcy] did not happen to us because we stuck to the rules of responsible economic behavior and we will continue to do so.” He was addressing a group of energy sector leaders.

“The world is in a terrible crisis that is not yet over,” Steinitz said on Tuesday.

The prime minister also mentioned that the government would try to raise income tax on people earning more than NIS 1 million per year. That measure will likely come next year, as will other tax increases.

Another potentially unpopular measure may be an increase on the price of gas by NIS 0.5 per liter, also meant to take effect August 1.

The prime minister said a lot of the country’s undertakings — free pre-school education, a  security fence against infiltrators along the border with Egypt, as well as new weapons and defense systems — are expensive and require an updated, “responsible” budget that reflects those realities.

“Whoever says it is possible to spend indiscriminately, without coverage, for populist objectives, is simply endangering the State of Israel,” he added.

The tax hikes are the first in a series of steps — raising taxes and planning budget cuts — whose aim are to cut Israel’s deficit.

Economists predict that the deficit may reach NIS 58 billion in 2013, as opposed to its target of NIS 30 billion, Globes reported. The 2012 deficit target of 2% of the overall GDP, or NIS 20 billion, is expected to be closer to NIS 40 billion, the report added.

The cuts are not meant to affect the elderly, disabled, or Holocaust survivors.

The raising of taxes and slashing of funds are likely to set off anger among the Israeli public. During a debate on higher taxes in the Knesset’s Finance Committee Tuesday, chairman MK Moshe Gafni (United Torah Judaism) said: “The Israeli economy is strong, but the middle class is suffering and there are serious social problems. Economic stability is important, but social stability is equally important.”

Criticism of the plan came swiftly from the Left.

Kadima party chairman Shaul Mofaz — until last week a member of Netanyahu’s governing coalition — slammed the prime minister’s plan, saying that Netanyahu “is intent on killing the middle class… After turning his back on public servants and the middle class, Netanyahu gives them the middle finger. The prime minister continues to trample on and destroy the Israeli public.”

Labor chairwoman Shelly Yachimovich also criticized the prime minister’s plan, saying, “It’s the Israeli people who will suffer, and bear the burden” of the tax increases.

Meretz chairwoman Zahav Gal-On added that the budget cuts would weaken social programs.

Leaders of the social justice movement — who managed to bring hundreds of thousands of people to the streets last summer, and who pushed social grievances to the center of the national public dialogue — have attempted to reignite protests in recent weeks to force a change in the government’s fiscal policy.