Those in charge of the economy in Israel will shortly have to provide a solution to the fiscal hole left by the war, with various possibilities available to them, some more popular than others.
To obtain a professional picture of the economic challenges created by the war and the action that needs to be taken, "Globes" talked to three former senior Ministry of Finance officials: Dr. Michael Sarel, a former chief economist (2012-2014) and now head of the Kohelet Economic Forum; David Boaz, budgets commissioner between 1987 and 1991, and David Milgrom, budgets commissioner between 1997 and 2000.
"There are 38 ministers and 30-something government ministries - there’s no sense in these numbers," says Sarel. "There are proposals to cut the number of ministries to fourteen, which is much more appropriate for Israel, from the functional point of view, from the point of view of coordination, and from the point of view of management efficiency. The argument that many ministers and ministries are required in order to keep the coalition stable is simply contempt for the public."
In Sarel’s view, another obvious step is to cut various tax benefits. "A lot of exemptions and benefits should be abolished. We could start with VAT. There are four exemptions from VAT that have no economic or social logic to them: the exemption from VAT in Eilat; the exemption for incoming tourists; the exemption on imports under $75; and the exemption on fruit and vegetables. These cost us a great deal of money. They are there for historical reasons, and because of various pressures. They don’t improve the position of the weaker strata of the population, and they make no contribution to the economy from the point of view of efficiency or productivity, and even do the opposite.
"Apart from that," Sarel adds, "there are exemptions from direct taxation as well that it would be worth abolishing. For example, there’s an exemption from capital gains tax in many areas and in places where it precisely helps the wealthiest. The exemption from capital gains tax on advanced training funds has no justification. There are many other items like these from which it’s possible to bring in revenue."
"Raising taxes harms growth"
Sarel warns against raising taxes. "It harms growth, and will only worsen the growth problem that we have in any case," he says. At the same time, he recommends cutting tax credit points. "The credit points for parents have grown dramatically in the past decade, and in 2024 they are due to grow by significantly more," he says. "These measures, if we were in a good fiscal position and did not have to make cuts, might somehow have been all right, but in the situation in which we find ourselves we have to find places where we can increase revenues and reduce expenditure."
Sarel also points to the public sector wage agreement signed last July whereby public sector employees will receive across-the-board pay rises up to the end of 2027. "It has to be said that we are in a situation we were not in when they signed this thing, and so it should be frozen, at least for now."
What about the coalition funds? "It’s very important to reduce them, not because they are for the coalition parties. It’s fine for there to be budgets for areas that any government wants to prioritize. But here, there are several reasons for stopping it. First of all, some of the programs have not yet begun, and once they start it’s very hard to cancel them, but the most important thing is that the coalition funds harm growth. We have evidence and studies that show that the teaching of boys in haredi society leads to the acquisition of education that is not appropriate for the modern labor market, and there is no reason to make the budgeting for a haredi child equal to that for a non-haredi child if that is the situation."
"Freeze the saving for every child program"
In the course of the conversation with him, David Milgrom stressed that decision making should be based on the notion that the reality has changed, and everything has to change with it. "The order of priorities has to change," he says. "If something was correct once that is no proof whatsoever that it’s needed now. Everyone has to say, ‘That was right at the time, but now there’s no choice and changes have to be made.’"
Like Sarel, Milgrom supports the proposal to reduce the number of ministers in the government. "Put the government ministries two years back," he suggests, "that is, cancel all the budget additions they have received in these two years. Let them go on a diet, it will save us billions."
Milgrom also subscribes to the idea of broad cuts in tax benefits. "You have to understand that tax benefits are given when in a certain year a certain sector presses and presses until it gets a benefit. From that moment it’s forgotten and stays with us going forward. Thus NIS 84 billion annually in tax benefits have accumulated. That’s equivalent to 20% of state tax revenues; benefits have been awarded that made it necessary to impose 20% more tax on the general public in order to finance them.
"A decision should be made that there will be no more such benefits via taxes, and instead we turn the benefits into a budget expense," Milgrom suggests. "Take NIS 84 billion in revenue and swap it for expenditure to support those who received tax benefits. At this stage, we haven’t done anything: we have neither cut nor added. But it’s critically important, because it will enable the public and the decision makers to see which benefits we are giving and to consider whether we want to continue these benefits, especially in the near future."
"Programs that should be reviewed"
In addition, Milgrom proposes reviewing various programs in the budget that in a good fiscal situation are beneficial to the public but that, in the current situation, ought preferably to be halted. "There’s a huge quantity of small programs that governments have promoted over the years that cost a great deal of money. They are all for good purposes, and were we in a position of fiscal plenty they might well be justified, but we are now in a different place. For example, the saving for every child scheme is a very important one, but at this time it would be worth freezing it for a few years in order to avoid having to make cuts in much more critical places. There are dozens more such programs that should be reviewed."
Finally, Milgrom warns about the government’s inaction. "The government’s current path, which amounts to doing nothing, is like speeding towards a cliff edge and no-one says stop. We hear politicians saying that there’s no need to act because perhaps it will blow over, because this is not the time to hit individuals and the public, and so on and so forth. That is very, very serious, and I think it obliges the Ministry of Finance to take determined action to make a correction, even if not a full correction, to bring down the expected deficit substantially. Action needs to be taken amounting to tens of billions."
"Raise taxes for two years"
David Boaz, who has drafted a document describing the action the government should now take, says that a program needs to be put into effect that includes raising tax rates, about which there are differences of opinion, including among the experts we spoke to. Among other things, Boaz proposes raising the rate of VAT from 17% to 19% for two years, a period that will be set by law.
This, he says, will result in an extra NIS 15 billion state revenue. "Besides reducing the deficit," he says, "such a step would signal to international players that the government is determined to maintain the budget framework. Morally speaking, this step would enable the government to require the public to agree to its policy measures and consent to a temporary fall in the standard of living."
Detailing his taxation plan further, he says, "Income tax on individuals will be raised by 2% on monthly income from NIS 21,000 upwards. Companies tax will be raised from 23% to 25%, and taxation of dividends will be raised by 2%. The rise in companies tax will add NIS 5 billion to state revenues, and the rise in taxation on individuals will add NIS 6 billion annually."
Boaz repeats that the rise in taxation will be temporary, with a commitment to restoring tax rates to their original levels as long as the ratio of government debt to GDP does not exceed 65%.
"The world will not be here for us"
In addition, Boaz proposes three types of sources for narrowing the gap between revenue and expenditure. Like Sarel and Milgrom, he supports "cancelling the coalition agreements, sectoral transfers, and the budgets of unnecessary ministries, and channeling the money towards covering the costs of the war." That way, he says, "at a conservative estimate, it will be possible to save NIS 14 billion, half of it in 2024."
In addition, Boaz believes that dividends should be drawn from government companies, a step that Michal Rosenbaum, who has just resigned as head of the Government Companies Authority, tried to introduce. "In the 2023 budget, it was determined that the government would draw dividends amounting to NIS 2 billion, but so far that has not been carried out. I estimate that in 2024 the state-owned defense companies could be made to pay out an additional dividend of at least NIS 1 billion."
Finally, Milgrom says, "From an economic point of view, there’s no such thing as ‘we’ll fight as much as necessary.’ Everything has its price, and the price of war is enormous. There’s something here that isn’t being talked about. Just as the world is not exactly standing by us in the war, the world will not be here for us economically, and unless we do what is necessary, it will be very problematic for us.
"If they continue as though it’s business as usual, meaning the minister of finance and the entire government - which advocates an economic policy that is unrealistic and not appropriate to the situation - then the danger is very great."
Published by Globes, Israel business news - en.globes.co.il - on January 2, 2024.
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