Chief economist signals where budget ax will fall

Shmuel Abramzon credit: Yossi Zamir
Shmuel Abramzon credit: Yossi Zamir

Recently released studies by the normally reticent chief economist's department in the Ministry of Finance happen to focus precisely on areas where the ministry could introduce painful measures.

The chief economist at the Ministry of Finance is not usually the most talked-about person in public discourse on the economy. Apart from the monthly housing market survey, publications by the chief economist’s department are not frequent, and don’t often make headlines.

Recently, however, something has changed. Within less than a month, Chief Economist Shmuel Abramzon has released three comprehensive and wonderfully relevant studies precisely on the issues currently the subject of debate in the Ministry of Finance.

The subjects chosen - the profits of vehicle importers, the haredi education system, and tax breaks - are among the focal points of the Ministry of Finance’s search for new sources of revenue and ways of reducing the heavy fiscal deficit. It seems as though the chief economist has started to make his presence felt actively just at the right moment, at the start of work on the 2025 budget.

It’s not clear whether this is an independent initiative of the chief economist’s department or stems from an order from above, but one thing is certain: the series of publications has a clear aim. It is intended to provide senior Ministry of Finance officials the theoretical and empirical basis for justifying to the public and the decision makers the painful measures that will be required in the budget, whether it’s a matter of raising taxes, cutting spending, or structural reforms.

The chief economist’s papers do not include a bottom line of recommendations for dealing with the challenges, but they correspond to the aspirations for the budget of the other branches of the ministry, and prepare the ground for them.

It is doubtful, however, whether the measures hinted at by the chief economist’s department will be realized in full. Political constraints, particularly the fierce objections of the haredi (ultra-Orthodox Jewish) parties, which have already been seen in the battle over the budget for the yeshivas, threaten to thwart the reforms. The road map sketched by the Ministry of Finance professionals will face the test of a complicated political reality on the way to approval of the budget.

Blaming the importers

The chief economist’s latest publication, released last Wednesday, deals with the profit margins of the vehicle importers. It reveals that "in 2022, the pre-tax profit of the twelve largest importers shot up to its highest level for at least the past twenty years, reaching NIS 5 billion, representing real growth of 35% in comparison with 2021." The study also states that the growth in profitability was achieved despite a decline in the share of the largest importers in the total turnover in 2021-2022 because the arrival of a "new player in the market", meaning Tesla.

The message of the study is clear: the Ministry of Finance is blaming the importers for the high prices of cars in Israel, rather than the government’s taxation policy. This is presumably a prelude to increasing the tax burden on the sector, whether through cancelation or reduction of the purchase tax benefit on electric vehicles, or whether through changes in the "green taxation" provisions in such a way as to make conventionally powered cars more expensive. As reported by "Globes" last week, such measures are under discussion at the Ministry of Finance.

Haredi education

Two days before the release of the survey of the vehicle import business, the chief economist’s department published a comprehensive review of the effectiveness of the haredi education system for boys. The study finds substantial gaps between the skills and qualifications acquired in that system and those acquired in the state system, which make it more difficult for its graduates to find their place in the workforce and in tertiary studies. It was found that the pay of young haredi men in full-time employment with no higher education was 16% below that of non-haredi Jews in the same category.

It’s no secret that the Ministry of Finance wants to see deep cuts in the budgets of the yeshivas and kolels (institutes of higher rabbinic studies), or at least to make continuation of the flow of funds conditional on reforms that will make significant broadening of the core curriculum compulsory. The chief economist’s study will serve to justify these measures in the face of the expected opposition in the coalition. In previous rounds, in the preparation of the 2023-2024 budget, a deep chasm opened up between the stance of the professionals in the Ministry of Finance and that of Minister of Finance Bezalel Smotrich, who gave preference to his political partnership with the haredi parties.

Taking aim at VAT exemptions

Two chapters of the state revenues report, which the chief economist chose to release to the press and media, bring to the surface matters that will be at the center of budget concerns. The chapter on the VAT system, distributed a month ago, puts a spotlight on the tax breaks in this area, which amount to NIS 8 billion annually. Most of the exemptions from VAT and reduced rates are on basic food items such as fruit and vegetables.

The Ministry of Finance has tried unsuccessfully in the past to abolish the VAT exemption for fruit and vegetables, partly on the grounds that this was part of the fight against the black economy. Between the lines of the chief economist’s reports, it can be understood that the Ministry of Finance is considering cutting these benefits, as well as raising the general rate of VAT.

Just a few months ago, it was determined that the VAT rate would rise from 17% to 18% from next January, but the word in the Ministry of Finance now is that that won’t be enough, given the fiscal hole created by the continuing war.

In the same spirit, a chapter of the report released a month previously, in April, presents the general picture of the various tax breaks given in Israel in 2023. The total value of these tax breaks is estimated at NIS 83.6 billion, or 4.4% of GDP. Of the total, some NIS 32 billion is attributed to tax breaks on pension savings, advanced training funds, and the like.

In previous years, the Ministry of Finance has made several attempts to cancel or reduce tax benefits on pension savings and advanced training funds, because of their high cost to the budget. These attempts failed after encountering opposition from the Histadrut, employers’ organizations, and members of Knesset.

The Ministry of Finance is avoiding saying so explicitly, but no-one will be surprised if it pulls out of the drawer the plans to erode tax breaks for savers in pension schemes and advanced training funds. The chances of it succeeding this time in bringing about substantial reform in this area look weak, especially given the dynamics of the current coalition. Nevertheless, the very fact of publication of comprehensive data indicates that the ministry has not completely given up its efforts to introduce change, and it may use them as a bargaining card in discussions on other issues.

Under the timetable for passing the budget, the Ministry of Finance is currently formulating its plan for balancing the budget and the retrenchment measures that will appear in it. After it receives the approval of the minister, Smotrich, who is likely to drop some of the measures, the Ministry of Finance will turn to negotiations with the other government ministries. In August, the budget plan is due to be approved by the government, and in September-October the detailed budget bill will be laid before the Knesset. The deadline for passing the budget on second and third readings is the end of December 2024.

Published by Globes, Israel business news - - on June 3, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Shmuel Abramzon credit: Yossi Zamir
Shmuel Abramzon credit: Yossi Zamir
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