Treasury proposes to cut benefits, hike taxes for lowest earners to fund war

Arrangements Law also includes measures taxing advanced study fund and pension contributions; the ‘government is going to hit you in the savings,’ warns Liberman

Finance Minister Bezalel Smotrich speaks during a press conference at the Finance Ministry in Jerusalem, September 3, 2024. (Chaim Goldberg/Flash90)
Finance Minister Bezalel Smotrich speaks during a press conference at the Finance Ministry in Jerusalem, September 3, 2024. (Chaim Goldberg/Flash90)

The Finance Ministry presented a list of politically tough spending cuts and tax hikes, including freezing some pension benefits and upping contributions to national insurance, to fund shortfalls in next year’s budget wrought by rising war costs Monday.

The program, which will raise taxes for those in Israel’s lowest income brackets, hike fees for those out of work and end sales tax exemptions for visiting tourists, is meant to help narrow the state’s ballooning deficit to 4% in 2025 by making NIS 30 billion to NIS 40 billion ($8 billion to $10.6 billion) in fiscal adjustments.

The changes were included in a draft of the Economic Arrangements Law published by the Treasury for public comment Monday ahead of the upcoming Knesset legislative session.

The vast omnibus piece of legislation, a companion to the budget which determines how funds will be disbursed, includes hundreds of stipulations presented over 240 pages, including legislative amendments required to make tax rate changes and other modifications.

For this year, the government had to raise the 2024 budget deficit target to 6.6% of GDP, from a planned 2.25%, due to higher defense and civilian spending to fund the year-long war with Hamas. Direct war costs have been estimated at more than NIS 250 billion since fighting began with on October 7, 2023, following Hamas’s brutal attack on southern Israel, in which some 1,200 people were killed and over 250 kidnapped to Gaza.

Finance Minister Bezalel Smotrich has committed to making the necessary preparations for the 2025 state budget so that it can be approved by the Knesset by the end of this year.

If it is passed by the deadline, many of the austerity measures to help reduce the deficit and fund war expenditures will come into effect in January. Failure to pass a budget by the end of March will trigger new elections.

Demonstrators gather outside the Knesset to protest the government’s 2024 wartime budget on February 19, 2024. (Charlie Summers/Times of Israel)

The draft raises the amount unemployed individuals must contribute to the state’s National Insurance and Health Insurance schemes, currently NIS 203 ($54) per month, by 10 percent.  The changes is expected to generate additional revenues of NIS 660 million for the state in 2025 and about NIS 2.13 billion per year from 2026 onwards.

The Treasury also proposes raising income taxes for earners in Israel’s lowest tax bracket by merging it with the next bracket up. The step would mean those paying the minimum rate of 10% would be taxed according to the 14% income bracket going forward.

Under the changes, interest and profits accumulated under Israel’s only short-term, tax-free savings plan — a so-called “advanced study” fund known in Hebrew as keren hishtalmut — would be taxed, and the state would also be able to skim a bigger take from deposits to pension funds.

Other measures include lifting an exemption on the value-added tax for visiting tourists.

The bill calls for negotiations with the Bank of Israel regarding a tax on bank profits, additional taxes on capital gains and real estate and the cancelation of tax exemptions for duty-free cigarettes and the privatization of the Port of Ashdod.

Illustrative: Ashdod port workers unload a container with millions of eggs imported from Spain at Ashdod port on April 5, 2020. (Flash90)

To further generate revenue, the Finance Ministry will also look to tax corporate profits that are reinvested by multinationals into business development, infrastructure, and research and development centers.

Until now, these profits were tax-exempt to encourage investment in Israel. The move, if approved by the end of the 2024 tax year, would boost the state’s revenues by NIS 10 billion in 2025.

The Arrangements Bill also proposes closing five government ministries as well as some diplomatic missions abroad.

According to national broadcaster Kan, Smotrich plans to propose that each of the coalition’s five parties offer to close one of the ministries they hold, though officials at the Finance Ministry have recommended that twice that number be shuttered.

The network reported that the move is an effort to tamp down criticism after a recent budget proposal did not include the closing of ministries seen as superfluous or cuts to coalition spending.

The proposals came under immediate fire from some opposition lawmakers, including Yisrael Beytenu head Avigdor Liberman, who dismissed the proposal as harmful to regular taxpayers.

MK Avigdor Liberman attends a hearing of the civil investigative committee on the October 7 massacre, in Tel Aviv, August 18, 2024. (Tomer Neuberg/Flash90)

“Citizens of Israel, this government is going to hit you in the savings, everything that you earned and saved up over the years; in the pension; in the advanced study funds,” the former finance minister said in a video message.

Aviad Houminer-Rosenblum, deputy director of the Berl Katznelson Center think tank, told The Times of Israel that the Arrangements Law is significant primarily because of what it does not contain: “significant reforms that will lead to growth in the economy or narrowing social disparities, spur employment in ultra-orthodox society or investment in the integration of Arab society.”

Houminer-Rosenblum argued that the new budget would harm “the weakest strata,” such as the disabled, discharged soldiers and Holocaust survivors.

“What it does have is an attempt to scrape money from the threshing floor to cover the irresponsible conduct of the war,” he said.

During a faction meeting of his Yesh Atid party in Tel Aviv Monday morning, Opposition Leader Yair Lapid accused Smotrich of trying to continue funneling benefits for previously exempt ultra-Orthodox yeshiva students who have not enlisted in the army in exchange for Haredi support for the budget plan.

“It’s a bribe. It’s illegal, it’s improper, and it’s designed to make sure they can evade the IDF and continue to receive money,” he charged.

Yesh Atid head MK Yair Lapid speaks during a faction meeting in Tel Aviv, October 14, 2024. (Miriam Alster/Flash90)

Lapid also launched a direct threat to civil servants in the finance and other ministries on Monday, calling on them to oppose government efforts to get around these legal restrictions.

“Do not cooperate with attempts to transfer and launder this money in illegal ways, because you will end up in the dock,” Lapid declared. “We will follow this money and we will not hesitate to file complaints with the police and lawsuits in the courts.”

Asked by The Times of Israel if he still stands by his previous prediction that the government will fall by the end of the year, Lapid said the budget woes would bring it down.

“They don’t have the money that they promised to distribute to everybody,” he said.

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