Israeli businesses and consumers have received a one-month reprieve on the one percent increase in value added tax.
VAT was meant to increase to 17 percent on Wednesday, but the hike has been postponed until September 1 following an agreement between Finance Minister Yuval Steinitz and Chairman of the Knesset Finance Committee Moshe Gafni (United Torah Judaism). Gafni asked for the VAT increase to be postponed by one month so that a proper parliamentary discussion could be held on the government's economic package.
The cabinet on Monday approved by a vote of 20 to 9 a package of steps aimed at reducing the deficit and dealing with the effects of the global economic crisis on the Israeli economy.
The new measures include raising income tax by 1 percentage point on monthly salaries exceeding the national average of 8,881 shekels ($2,198) in 2013. Taxes on monthly salaries of over 67,000 shekels will go up 2 percentage points. Income tax rates in Israel range from 10% to 48%. Most government ministries' budgets will be trimmed by 5% and tax on cigarettes and beer went up overnight last week.
The Knesset Finance Committee met on Wednesday to discuss the austerity package, and Steinitz and Bank of Israel Governor Stanley Fischer both attended. Fischer told the committee that even more budget cuts may be necessary in order to deal with the structural problem in Israel's budget.
Fischer said that it is important that the budget situation be managed now, since Israel is not in a recession.
"If we don't take care of the situation now and the crisis in Europe worsens, we will find ourselves forced to make cuts during the height of a recession, and the criticism that will be heard will be absolutely justified," Fischer said.
The Knesset will hold a special session on Monday to discuss the package.
Gafni argued that by law, VAT could only be changed following a discussion between the Treasury and the Finance Committee, and must pass one reading in the Knesset plenum. Treasury officials made repeated attempts on Tuesday to persuade Gafni to agree to the VAT increase, but in the end announced that the VAT increase would be delayed. The state is expected to lose some 15 million shekels this month by postponing the VAT hike.
Gas prices went up on Wednesday by 0.43 shekels ($0.11) per liter, and the maximum price of full-service 95-octane gasoline is now 7.86 shekels ($1.97) per liter. The increase would have been 0.07 shekels higher had the VAT increase gone into effect as planned on Wednesday as well. The reason for the sharp rise in gas prices is the rising global cost of fuel and the weakening of the shekel against the dollar.
In addition, the cost of price-controlled bread will go up by 7% in the next few days. The basic staple will increase from 4.90 shekels to 5.24 shekels, and again in September when the VAT increase comes into effect to 5.28 shekels.