The government was set to approve Monday drastic spending cuts and a variety of tax hikes in the latest effort to reduce the deficit. At the weekly cabinet session on Sunday, Prime Minister Benjamin Netanyahu asked ministers to approve a 1.1 billion shekel across-the-board spending cut and a series of reforms to the tax code, urging them to demonstrate, "determination and responsibility to defend the Israeli economy. It is incumbent upon you to demonstrate collective courage."
"Over the past three years the global economy has experienced an ongoing crisis," Netanyahu said. "We managed to protect the Israeli economy from the effects of this crisis and to preserve jobs, and in that respect we are an outlier. But we have reached a point where the crisis has not only failed to subside, it has exacerbated. The worse it gets the more is required from us. The steps we are taking today are designed to protect the Israeli economy and preserve jobs."
The prime minister touted the accomplishments of his 3-year tenure as prime minister, among them subsidized dental care and education for toddlers, and reforms in the mobile communications industry. He also said Israel must maintain fiscal discipline and resist populist measures lest it find itself sharing the same fate of several European states whose record debt crippled their economy.
Overall, the new statutes are expected to generate some 20 billion shekel ($2.93 billion) in new revenue and avoid a breach of the budgetary framework and an overshooting of the target deficit for the fiscal years 2012 and 2013. According to treasury officials, these austerity measures are in order due to new spending in projects that have been underfunded or whose implementation became more pressing. Chief among them is the construction of the security fence along the Egyptian border to fend off illegal African migrants and the overhaul to the fire services. The measures are also designed to address the shortcoming in home front preparedness and to fund the some of the social benefits proposed by the Trajtenberg committee, set-up in the wake of last summer's social justice protests.
In the run-up to the meeting, the Finance Ministry and the government said the austerity measures were necessary due to the slower-than-expected growth. The recession in the euro zone has had a ripple effect on Israel, said the Finance Ministry in the official proposal that was submitted for a vote on Monday. If the Israeli economy continues growing at the annual rate of 2.7 percent noted in the first quarter of this year, the government would breach the budgetary framework due to lost revenue. As a result, Israel could have its credit rating downgraded, Netanyahu explained last week.
For those earning more than 8,875 shekels ($2,197) per month Monday's decision means a higher income tax rate on their salary effective January 2013. Also the value added tax, which consumers pay on almost all transactions, would climb back to 17% (it was lowered to 16% a few years ago). A new so-called "wealth tax" will be imposed on those earning more than 67,000 shekels ($16,591) per month. In addition, the government plans to tax the so-called "exempt profits," namely profits that companies could hoard so long as they did not use them to pay dividends to their shareholders. Those who own more than one home or drive certain vehicles that generate a high level of pollution would also see their taxes raised. In addition, the tax credit granted to those who buy eco-friendly "green" cars will now be limited to the first few years immediately following the purchase. Also, certain bills that have not been sponsored by the government and lack a funding mechanism would not be funded by the 2012 and 2013 budget.
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