Prime Minister Benjamin Netanyahu's economic policies exacerbate inequality, said former Ministry of Finance director general Prof. Avi Ben-Bassat in an interview with "Globes". He cautioned, however, that there is no solution to rising prices of goods, not all of which are the government's fault. The only urgent thing that the government should do is freeze the reductions in the income tax and company tax, because of their effect on social inequality.
"Globes": What's happening? Everything is going up: housing, food, water, fuel, electricity.
Ben-Bassat: "There is no connection between these things, and there is no common factor between them. The rise in housing prices is nothing new, and is because of the low interest rate, which has increased demand for property. The government did not respond to this rise by changing the supply side.
"The government can do nothing about the worldwide rise in food prices. In the case of gasoline, the government made its contribution. Obviously if the global price of oil is already rising, the government should not add to it by raising taxes. Taken together, however, there is no general solution or common treatment."
Is the tax policy problematic?
"Tax policy in recent years has also created problems with prices, but most of all it has created economic inequality. Netanyahu's tax policy, income and company taxes should be lowered to create economic incentives, while keeping the deficit and debt as low as possible. This is a long-term policy that began in 2003 (when Netanyahu was finance minister) and will continue through 2016.
"To offset the direct tax cuts, the cap on National Insurance Institute levies, VAT, and the fuel excise. The tax policy completely changes the composition of taxes: income tax is cut, but VAT and other indirect taxes are raised. These rises heighten the inequality curve, which hurts the poor."
Ben-Bassat says that the poor are hurt more than the rich because the poor consume nearly all their income, whereas the rich save most of theirs. Indirect taxes apply to consumption, which means that the tax burden on low income-earners is proportionally greater.
"What the Israeli government should do now is to freeze the reduction in direct taxes and cut the indirect taxes," Ben-Bassat says. "If the government has resources, I would cut VAT as the first priority, because it is levied on all goods."
Ben-Bassat believes that politics, not economics, is behind the current unrest. "The government was weakened when the Labor Party quit. There are tensions within the coalition parties. This is what dictates the timing," he says. "Obviously, this does not mean that the policies shouldn’t be corrected."
He says that current developments that the switch to a biennial budget was a mistake. "We discovered this week that, just like in the previous budget, the defense budget will increase by NIS 700 million, after the Knesset approved the budget. This is unacceptable and bad. Moreover, it is very probably that the concessions that the government is planning will be financed by budget cuts, which should not take place only six weeks after the Knesset passed the budget."
Ben-Bassat was prescient: today, Prime Minister Benjamin Netanyahu cancelled the excise hike on gasoline, he cut the individual tax rate and suspended the cut in the company rate, among other measures.
Published by Globes [online], Israel business news - www.globes-online.com - on February 10, 2011
© Copyright of Globes Publisher Itonut (1983) Ltd. 2011