Israeli Cabinet Approves Higher Taxes, Cuts in Spending

Israeli Prime Minister Benjamin Netanyahu’s Cabinet approved today a plan to increase taxes and cut spending in an effort to contain the deficit.

Under the plan, approved by a vote of 20 to 9, value-added tax will be increased by one percentage point to 17 percent from Aug. 1. Income tax will rise in 2013 by one percentage point for most tax brackets, and by two for those who earn 67,000 shekels ($16,594) or more a month. Last week, Finance Minister Yuval Steinitz raised taxes on beer and cigarettes.

“This is a brave and important step that will prevent a deterioration in Israel’s economy,” Steinitz said following the vote.

The finance minister’s plan was submitted to the Cabinet just days after the Bank of Israel’s monetary policy committee, led by Governor Stanley Fischer, kept the benchmark interest rate at 2.25 percent, in part citing “uncertainty in fiscal policy.”

Steinitz said following the rate decision that the government was drafting plans to meet its new deficit target. The steps approved by the Cabinet include across-the-board cuts in spending this year and next. Parts of the tax and spending package require parliamentary approval.

‘Fiscal Credibility’

“There is no doubt that the government’s recent measures are improving fiscal credibility,” Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd., said in an e-mailed report. “The government’s actions are providing some opportunity for the Bank of Israel governor to continue lowering the interest rate.”

The rate decision was the second time in as many months that Fischer publicly criticized the government. He said on June 28 that the government’s increased budget deficit target for next year isn’t reasonable and interest rates are unlikely to stay low unless fiscal policy is put on a “sustainable” path.

The Cabinet voted on July 1 to double the deficit target for next year to 3 percent of gross domestic product as the economic growth rate fell to its lowest in almost three years. Fischer had recommended 2.5 percent.

Economic growth is expected to decelerate to 3.1 percent this year from 4.8 percent in 2011, the central bank said on June 25. The slowdown has reduced tax revenue, creating a 2.9 billion-shekel shortfall in the first six months of the year, the Finance Ministry said on July 4.

“Governments that didn’t act on time, didn’t act decisively, and didn’t act responsibly, caused tremendous damage to their citizens,” Netanyahu said at the Cabinet meeting today, according to an e-mailed statement.

In the first quarter, the economy grew an annualized 2.7 percent, the least since 2009. In the second quarter, the economy is expected to expand 2.8 percent, the bank said in the rate decision. Inflation eased to 1 percent in June, the slowest since August 2007.

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