IMF: Raise taxes to solve Israel's traffic congestion

Traffic jams

The IMF gave public transportation in Israel's cities an unsatisfactory rating, saying that road congestion cost passengers an average of 60 minutes a day.

"Unsatisfactory" is the rating given by the International Monetary Fund (IMF) to public transportation in Israel's cities. In the full report summarizing the IMF's visit last month, published today, the IMF explains how Israel has come to lag far behind OECD countries in infrastructure, and why the gap cannot be closed without raising taxes or eliminating tax exemptions.

The writers of the report handle the politically explosive issue of public transportation on the Sabbath gingerly, but do not refrain from stating that this is one of the main reasons for road congestion. They state that the level of public transportation in urban areas in Israel is clearly unsuitable to the needs of a growing population with a high standard of living, adding that the fact that public transportation in Israel does not operate on Sabbaths and holidays creates a powerful incentive for urban residents to buy private vehicles. As a result, road congestion in Israel is the highest of any OECD country by a wide margin.

The IMF estimates that road congestion cost passengers an average of 60 minutes a day in 2012 and says that the problem will worsen in the coming years, due to the projected rapid rise in the number of vehicles.

In an in-depth analysis, IMF's economists explain the roots of the problem reflected in daily congestion at the entrances to Tel Aviv and elsewhere. They say that since the mid-1990s, Israeli governments have invested too little in infrastructure as a result of a tight budget policy designed to reduce public debt. As a result of this policy, public investment in Israel has fallen to less than 2% of GDP in recent years, compared with an average of 3% of GDP annually in the first half of the 1990s. The IMF states that the cumulate infrastructure gap between Israel and the reference countries amounts to 35-40% of GDP, while a study conducted by McKinsey for the Ministry of Finance Accountant General department reports a gap of "only" 20% of GDP. 1% of GDP is equivalent to NIS 12 billion.

The IMF describes in detail the actions taken by the Israeli government to close the yawning infrastructure gap. According to the IMF, the government is operating according to two multi-year infrastructure investment plans: an Investment for Growth plan in 2017-2021 and an Infrastructure 2030 plan scheduled to continue for five years after the current plan.

The IMF writes that the Investment for Growth plan includes investment totaling NIS 107 billion in transportation, education, social services, and construction, NIS 41.7 billion of which will come from the state budget and the rest from fees, levies, and financing to be raised by the private sector (in private public partnership (PPP) project).

The IMF states that the Infrastructure 2030 plan is designed to increase investment in high-speed and underground railway networks in the Greater Metropolitan Tel Aviv Region, construction of a high-speed train to Eilat, and one new airport in both southern and northern Israel.

In the second section, in a report about infrastructure, IMF's economists analyze in depth using macroeconomic models the options available to the state for closing the historical infrastructure gap. For example, in considering whether to invest in roads or mass transit systems, the IMF says that investment in roads gives a quicker return in the early years, but after eight years, a mass transit system gives a larger return, although the rates of return are strongly affected by the system's efficiency.

In considering the options for financing the huge investments needed in infrastructure, the IMF considers a number of possible scenarios. For example, if the state wants to pay for the additional investment by raising taxes, it will have to raise VAT from 17% to 21% within two years. If the government prefers raising income tax instead of VAT, it will have to increase the average rate from 25% to 27%.

The IMF actually recommends a third alternative: reducing tax benefits by NIS 12 million a year, which it believes will achieve the best results. The Ministry of Finance estimates that tax benefits and exemptions will reduce state revenue by NIS 66.7 billion in 2019.

Poverty and inequality will increase

Barring substantial rapid changes in government policy, poverty and inequality will again increase in the coming years, mainly because of the growth in the haredi (ultra-Orthodox Jewish) and Arab population groups, the IMF's final report on Israel published today warns.

The IMF advocates a major expansion in negative income tax, basic changes in occupational training, the introduction of core curriculum subjects in haredi schools, and expansion of welfare programs for poor people, while making them contingent on completion of courses providing occupational skills.

According to the IMF, in order to narrow the gap in productivity and labor force participation among poor people in Israel, comprehensive reform increasing resources for education and occupational training is needed, in addition to measures for reducing the wage gap between men and women. If the income gap between different groups and between men and women can be narrowed, output can be increased by 22% by 2030. Two thirds of the added output will come from narrowing the gap between men and women.

The IMF also recommends changing welfare policy in order to reduce inequality, but this must be done without increasing the negative incentives to work. The IMF report therefore states that welfare payments should be made contingent on going to work or undergoing occupational training. In order to generate the necessary resources, the government should consider changes in priorities, reforms to enhance the effectiveness of teacher training institutions, or increasing state revenues.

The IMF report stresses that over half of the women who either do not enter the labor market or do not work full-time are refraining from working part or full-time in order to take care of children. The report states that this situation is a result of the inadequate supply of pre-school childcare institutions. Public spending on pre-school childcare in Israel is 0.1% of GDP, among the lowest in the developed countries, compared with 0.5-1% in Scandinavia.

Due to the high proportion of women working part-time, their proportion among managers and entrepreneurs is low. According to the IMF's figures, the gap between men and women is 76% among entrepreneurs and 46% among managers.

Published by Globes [online], Israel business news - www.globes-online.com - on May 1, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Traffic jams
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