Naturally, the Israeli public has expressed his frustration and disappointment in light of the first budget passed by the new Finance Minister Yair Lapid. In this article I would like to address and analyze some of the steps implemented by Lapid:
Raising the tax rates too high would cause negative consequences
One of the main decisions taken in this budget cycle relates to the increase in the VAT (Value Added Tax) by 1% to a total of 18%.This step would obviously increase the state’s revenues and yet it would mostly harm the lower and middle class. The question is whether Lapid had any other choice and this is a question we cannot answer without thoroughly analyzing the complete budget.
Beyond that, the decision to raise the income tax by 1.5% affects first and foremost the middle class because nearly 50% of the population hardly pays income taxes. If we take into account the previous increases we are to reach the inevitable conclusion of a significant and consistent increase as far as the tax burden is concerned in recent years. The main contribution of high income individuals in this last budget had to do with the decision to raise the surtax by 2%.
The main question we need to focus on here is whether the government should have imposed higher taxes on high income earners? The answer is rather ambiguous because history (and common logic) taught us that raising taxes too high in a disproportionate scale would actually harm the economy because people would lose the basic incentive behind their initial decision to actually go to work.
When it comes to the question of raising The Corporate Tax, we quickly face the same dilemma. Surely, bigger companies should indeed pay more taxes, and yet raising the corporate tax obviously affects the entire business sector – with small and medium businesses included, and so the government has to ensure that their growth will not be impeded. Overall, I think that the government’s decisions regarding taxing policy are economically reasonable even if some people disapprove of it. Whoever thought you could close the 40 billion shekels deficit easily and instantly without hurting the middle-class at all was bound to disappointment.
The real key to growth – the Ultra-Orthodox and Arab integration in the labor market
The decision made on paper to reduce the defense budget by 3 billion shekels is a difficult decision to judge at this time because only time will tell whether an actual reduction would in fact take place or not. The current budget is not Lapid’s real test – mainly due to the limited time he had before having to pass it. There are quite a few promises Yair Lapid had built his election campaign on – these promises would be his real test – and the real test of the entire government.
Above all, it is important to remember that if the government does not integrate both the Haredim and the Arab Population into the labor market – no long-term plan will succeed. Unfortunately, the crucial Haredi education reform hasn’t been implemented yet (as well as in other educational streams) while child benefits were in fact already cut. A similar move was implemented back in 2003 and it in fact led to economic growth but at the same time it contributed significantly to the ever widening social gap.
At this time we urgently need some complementary actions that will go hand in hand with the implemented budget steps. Education reform on one hand and professional qualification programs on the other are crucial. Only by going forward in both paths – we shall achieve the desired result.
The government must address the challenges of the real estate market
Recently everyone is talking about structural economic reforms, such as the National Ports reform or that of Israeli Electricity Company. Many people forget that this is not some magic wand which guarantees success. For example, the privatization of the Electricity company will not necessarily contribute to the economy because the prices won’t necessarily drop as far as the consumers – the end-users – are concerned. I believe that instead of privatization, the IEC is in fact in an urgent need for proper management and even more so – for a more wise policy having to do with the use of our gas reserves.
Moreover, one of the most important reforms that few people talk about is the water market reform. In recent years, water prices have soared, mainly due to the cost of water corporations. Reducing the amount of municipal corporations should also lower the water rates for consumers – and that is the ultimate goal of this reform.
I have addressed the IEC reform, the Water Market reform and also the National Ports reform – and yet the main reform is the one that concerns the Real-Estate Market. For example, the government should implement steps that would shorten the amount of time it takes to receive a building permit and also make it easier for real estate investors to offer and sell the available land. This is the government’s main challenge because it has to take care of the young couples who simply can’t afford an apartment and so the government must do all in its power to restrain the rising real-estate prices.
Finally, the current Finance Minister as well as the current government should be tested only in a few years time. At this time it is too early to judge and praise or criticize the decision makers. In two years time we will certainly be smarter.