What’s on the mind of Israelis these days

David Weinberg
May 10, 2013

With Syria disintegrating and hi-tech weapons popping loose, Hezbollah and Iran threatening retaliation for apparent Israeli bombing raids, and Sinai becoming an Al-Qaeda playground – you would think that Israelis have plenty to worry about.

They do. But they also are intensely focused these days on the local economic situation.

The national budget for 2013-2014 promulgated this week by new Israeli Finance Minister Yair Lapid digs deeply into the pocket of every Israeli citizen, including middle class Israelis whom Lapid had promised to protect and advance. The draconian austerity measures Lapid introduced seek to erase a whopping NIS 55 billion ($15 billion) budget deficit that was wracked up under the previous government.

The Israeli government will implement NIS 7 billion (about $1.9 billion) in budget cuts between August and December 2013. The government will also reduce expenditure by NIS 18 billion ($5 billion), and raise tax revenue by NIS 14 billion in 2014.

For the average citizen, what stands out are a lot of new taxes, including a 1.5% income tax hike in all personal tax brackets, a 1% value added tax increase on all goods and services, new taxes on tourism and other previously-exempt services, new health and social security taxes, and new taxes on pension savings, luxury goods, on tobacco and alcohol and more.

Various customs duties, such as on imported textiles and fish, will also be increased. Co-payments for medical treatments covered by the public health basket will be raised to the tune of NIS 200 million. This means patients will be paying more for doctor’s visits, trips to the emergency room, medicines and equipment such as hearing aids. Lottery winnings will be taxed at a much higher rate too.

It will become much harder to qualify for unemployment benefits, municipal tax reductions, and reductions in health plan premiums and school fees. Both parents will have to be working in order to qualify for many such benefits. The new rules will strike most deeply at the Ultra-Orthodox world (where more than 40% of men are studying, not working) and the Arab community (where women do not often work outside of the home).

Separately, the price of electricity is to rise 5.5%. Electricity already has gone up over 20% in the past three years. Basic foodstuffs under government price controls already have risen this past year, including bread, milk, cheese and eggs, and these goods will now become more expensive as well, as will water supply to both households and industry.

There will also be a 1% increase in corporate taxes. Companies enjoying tax breaks under the Law for Encouraging Investment will be paying higher income tax rates as well.

There will also be drastic cuts in government spending, across the board. The most notable cuts are close to NIS 2 billion ($560 million) a year in child benefits, cuts in dental care for children, a complete cut-off of government funding for after-school programs for children, and deep cuts in school budgets and teacher benefits (NIS 1.5 billion in cuts in each of the next two years).

There will even be a sharp cut in the defense budget (between NIS 3 and 5 billion).

In addition, there will be an immediate 1% cut in manpower in the Civil Service, and another 1% cut in early 2014. In addition, no new positions will be approved in the Civil Service until 2015. The transportation ministry’s budget for new roads and railways will be cut by NIS 1.2 billion. The foreign ministry will have to close five missions overseas, and several magistrates courts will be closed. The Chief Scientist, who budgets have been a key engine for the high-tech start-up sector, will see his budget cut significantly as well.

In short, every citizen in Israel is going to feel the pinch; actually, much more than a pinch. Some of the fee hikes and new taxes take effect already this week by executive order; VAT goes up next month; and the rest of the “gzeirot” (the unpleasant decrees, as the media has dubbed them) will be implemented after the Knesset passes the relevant legislation in late July.

Nobody is really at fault for the tight economic spot Israel finds itself in. The economy is actually in good shape, with high rates of growth and low unemployment, and a stable financial sector. But the global economic downturn has negatively affected Israel’s high-tech and other export sectors, leading a significant drop in government tax revenues. Defense spending shot up over the past five years, for obvious and uncontrollable reasons. The mass social protests of two summers ago also forced the government into launching some expensive new social programs, such as free kindergarten education, cheaper government-backed mortgages, cheaper land for construction, and so on.

All these additional costs and revenue-holes have now coalesced into creating the massive budget deficit. Stanley Fisher, the respected Bank of Israel governor, is not “allowing” the government to raise its deficit ceiling too much.

Prime Minister Benjam Netanyahu, Finance Minister Yair Lapid and Economy Minister Naftali Bennett are not finished with their “shock and awe” onslaught. They intend to next take on some of the biggest unions in the country (such as the port and dock workers and the electricity workers union), chop up cartels, break industrial and consumer monopolies, and burst bureaucratic blockages that stand in the way of small business advancement. They have also begun to revamp civil-military codes that have been in place for decades. This means not just greater integration of the Haredi sector in the military, but also a new differential approach to length of military service for male and female soldiers and the remuneration paid to combat and rear-service soldiers.

With so many significant shake-ups and shake-downs underway and still to come on the domestic front, Israelis don’t know what to be worried about most or first: loose chemical weapons in Syria, or their ever higher tax bill; uranium-enrichment centrifuges in Iran spinning merrily away, or their mushrooming monthly expenses. Abroad and at home, the challenges abound.

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