For several weeks, senior officials at the Prime Minister's Office, the Ministry of Finance, and the Bank of Israel have been meeting to develop a general economic plan to somewhat ease the pain of rising prices. It is clear to everyone, including Prime Minister Benjamin Netanyahu, who initiated the discussions, and Minister of Finance Yuval Steinitz, who adopted them, that the options are very limited.
Participants in the meetings include Ministry of Finance director general Haim Shani, Prime Minister's Office director general Eyal Gabai, National Economics Council chairman Eugene Kandel, Budget Director Udi Nissan, and Deputy Governor of the Bank of Israel Zvi Eckstein. Other government, Bank of Israel, and income tax officials sometimes also participate.
Netanyahu and Steinitz are personally involved. The members raise their own ideas and hear the ideas of others, and then discuss them. The idea that has gone the farthest is to widen the criteria for the earned income tax credit (negative income tax) so that additional working people can benefit. The earned income tax credit will only come into effect nationwide in January 2012, and the officials are considering bringing the date forward. The idea is to bring more families into the program and maybe more income levels.
The officials have also discussed and weighed an idea to use the gasoline excise to finance government subsidies to lower public transport fares, as the poor use buses more than the rich. The figure of NIS 300 million has been mentioned, and there is an idea to boost the subsidy to NIS 500 million a year.
Another proposal is to increase the child allowance for the bottom 30%, while cancelling the allowance for the top 10%. It is not clear whether this can be implemented.
The officials discussed and rejected an idea to cut VAT by 0.5 or 1 percentage point. The rejection is probably final, on the grounds that the public won't feel the reduction, certainly not as much as the effect of the rising prices.
Another option under discussion is to raise the cost of water for so-called wasteful users at the expense of careful users.
The timing of the discussions is no coincidence. Minister of Finance Yuval Steinitz set up today a committee that will examine the pension savings tax benefits model. The clear goal is to find additional sources of revenue that will finance the deficit and allow more and more easing of taxes. In other words: cancelling several historical, and problematic, tax benefits. It is possible that Netanyahu and Steinitz will agree to sit with Histadrut chairman Ofer Eini in negotiations aimed at forcing him, alongside conceding to some of his demands, to "give" something in return - in the form of a cancellation, even a partial one, of the tax exemption granted on advanced training funds. That exemption is considered one of the most uneven and unjustified tax breaks, as the main beneficiaries of it are the economy's strong employees. The chance that Eini will be prepared to concede on that issue is extremely slim, and the option of forcing it on him can shake the economy. The last one who tried that was former finance minister Ronnie Bar-On, and within a week he had to fold and publicly apologize to Eini.
Netanyahu and Steinitz understand that they are slowly falling into the hands of Ofer Eini and their political rivals. Those are taking full advantage of the situation, and the Prime Minister and Finance Minister have little to do. The two are in a battle which they cannot win, no matter what they do. They know that. The prices of commodities around the world are soaring, and heavily influencing a significant portion of Israel's citizens. The prices of "basic" items have risen, and will continue to rise. It does not begin with the government of Israel. It is the world. Facing them is a smiling and provocative coalition, which does not have debts or commitments, and is not bound by discipline or the need to account for the unemployment level or economic stability.
The level of frustration is very high. A drop of one shekel in the price of gasoline is worth NIS 6 billion. A cut of 0.5% in the VAT is worth around NIS 2 billion - but who will even feel it, and how will it help the rising price of bread, electricity, water, and rice?
But the pressure increases. It increases from the nation, and also from ministers, MKs, and Likud activists who fear the loss of votes. But if Netanyahu opens the public coffers and begin to distribute money, he will reach elections, in a year and a half or a bit more, with an empty coffer, and an economic catastrophe. A real trap.
Through all this, as ever, returns the idea of financing the needy, not the consumer. Cutting the price of gasoline won't help someone who doesn't have a car, or who is counting his shekels for gasoline, insurance, and annual test. Subsidizing flour is superfluous for those who buy special bread at NIS 20-30 per loaf. Cutting the price of water is not critical for those who are watering a lawn and fruit trees on a quarter-acre spread around their home. There are families and income levels, for whom child allowances and birth allowances, for example, are quite marginal.
Is it not the time to give to those who really need, and not to everyone through consumer spending? True, it is not universal, and maybe is not especially social, and primarily it is bureaucratically complicated and difficult to implement. But maybe there is no choice.
Published by Globes [online], Israel business news - www.globes-online.com - on February 7, 2011
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