Netanyahu Unveils Israeli Stimulus Plan

Israeli Prime Minister Benjamin Netanyahu is making good on his campaign promise to cut taxes in a bid to avert the most serious economic crisis in the country's history. On Apr. 23, Netanyahu and his Finance Minister, Yuval Steinitz, announced an immediate 1% cut in the corporate tax rate and a similar cut in personal income taxes that will take effect next year.

The long-awaited stimulus plan is aimed at preserving jobs and jump-starting the economy. "We have to cut taxes to be more competitive and capture a larger market share at a time when the global economy is shrinking," Netanyahu said at a press conference.

Comparing Israel's economy to a plane in free fall, Netanyahu said the wide-ranging package is aimed at getting "the economy on an upward thrust." In addition to the immediate tax cuts, the government plans to lower the maximum rate from 46% to 39% for individuals and from 26% to 18% for companies by 2016. The government also said it will double the amount available in loan guarantees to banks, to $3 billion, in a bid to revive the country's hard-hit export sector. Additional plans unveiled include major infrastructure investments, large-scale job retraining programs, and the expulsion of tens of thousands of illegal foreign workers.

Exports Drop 30% in First Quarter

Markets and business leaders welcomed the plan. Share prices on the Tel Aviv stock market rose in response, taking the Tel Aviv-25 index of leading industrial companies up 1.7% by midday. "The new government has done in two weeks what the previous one failed to do since the crisis erupted by encouraging exports and getting credit moving to the business sector," says Shraga Brosh, president of the Israel Manufacturers Assn. But he stressed that the real test would be in the details. Brosh, along with Ofer Eini, the powerful leader of the Histadrut Labor Federation, already have begun negotiations with the government on various aspects of the plan. Their support will be crucial for Netanyahu and Steinitz to get the scheme implemented.

The painful recessions in Europe and the U.S., Israel's main trading partners, have especially hurt exports, the locomotive for the country's rapid economic growth in recent years. Exports fell by 30% in the first quarter, to $9.4 billion, leading economists at the Bank of Israel to predict that the country's economy will shrink 1.5% this year, its worst performance ever.

It's a stark contrast from the last five years, during which time the economy grew by an average of 5% a year. The Israeli central bank already has cut its base rate to a record low of 0.5% in an attempt to help the economy. It also has been buying up government bonds to lower long-term interest rates and is continuing to purchase $100 million daily to help weaken the shekel.

Unemployment Worries

The big unknown is how the government plans to offset its loss in revenue due to tax cuts at a time when the country's deficit is expected to climb to more than 6% of gross domestic product. Finance Ministry officials are contemplating various options including $5 billion in budget cuts over the next two years, the cancellation of the VAT exemption on fruits and vegetables, an increase in the gasoline excise tax, and a wage freeze in the public sector. The details are expected to be announced in the coming weeks. "The poor and the middle class will not benefit from the tax cuts, and they will be paying much more for just about everything," says former Finance Minister Roni Bar-On.

The most urgent task at hand is dealing with unemployment, as the number of Israelis losing their jobs has run around 20,000 per month since the beginning of the year. In January, the unemployment rate already stood at 6.8%. "Our forecast indicates an additional 130,000 people could be out of work by the end of the year," said Yossi Farhi, director of the State Employment Service. Israel's Industry, Trade, and Employment Minister, Benjamin Ben-Eliezer, is planning to unveil a plan next week to deal with the situation.

No one is predicting a quick turnaround. Even the most upbeat forecasts are for economic growth to resume in 2010 at the earliest. Finance Minister Steinitz, who has taken some criticism for his lack of experience, was cautious in saying he hoped that within a year or two Israel would see signs of new growth. But that's likely to depend largely on a global economic recovery, which so far appears only vaguely on the horizon.