The dispute between Minister of Finance Yuval Steinitz and top Ministry of Finance officials is worsening. Sources inform ''Globes'' that in ministry discussions, Budget Director Gal Hershkowitz and Accountant General Michal Abadi-Boiangiu are demanding in addition to a 1% VAT hike to 17%, an income tax hike across all brackets and the complete ignoring of hoped-for tax revenues from the freeing of companies' trapped profits.
Steinitz, however, has declared "modest and measured" tax hikes, which will probably include a VAT hike, in line with the wishes of Prime Minister Benjamin Netanyahu. Steinitz also wants to rely on NIS 8-10 billion in tax revenues from the freeing of companies' trapped profits.
"We must not rely on trapped profits. Zero must be written on this line," a top Ministry of Finance official told "Globes". Hershkowitz and Abadi-Boiangiu argue that any tax revenues from this item are unknowable, and cannot therefore be used in building the budget.
More importantly, in line with Governor of the Bank of Israel Prof. Stanley Fischer and top Israeli economists, Ministry of Finance officials say that the government deficit is structural and permanent, so even if there are tax revenues from the freeing of companies' trapped profits, they will be a one-time fix for 2013. The shortfall will re-immerge in 2014, because the gap between government income and spending will be too big, and it will be structural. The only solution to a structural deficit is higher taxes.
Top Ministry of Finance officials therefore want a VAT hike of at least 1%, which would add NIS 4 billion in tax revenues a year, and they also want an income tax hike across all brackets, which will add another NIS 3 billion a year.
The ministry officials are also pressing for the elimination of important tax exemptions in the 2013 economic plan, beginning with the exemption of capital gains from advanced training funds, which would generate NIS 2.4 billion in annual revenues, and the elimination of VAT on fruits and vegetables, which would generate a further NIS 2.12 billion.
These disagreements come on top of the dispute between Steinitz and top Ministry of Finance officials over the doubling of the 2013 deficit target to 3% of GDP. Netanyahu and Steinitz overruled the opinion of Hershkowitz and Abadi-Boiangiu, who called for a raise to 2.5% of GDP. Fischer is also calling for a 2.5% deficit target.
Even with the 3% deficit target, which amounts to NIS 30 billion, Ministry of Finance officials are calling for tax hikes to generate NIS 12-15 billion in revenues (1.2-1.5% of GDP). The demand is based on estimates that the 2013 deficit will actually balloon to 4.2-4.5% of GDP, a level considered intolerable by Ministry of Finance and Bank of Israel officials, as it is liable to lead to a financial crisis.
Published by Globes [online], Israel business news - www.globes-online.com - on July 1, 2012
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