supermarket - Ofer Vaknin - June 17 2011
Israelis are paying far too much for milk products in supermarkets. Photo by Ofer Vaknin
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The Trajtenberg committee, charged with examining the nation's cost of living, is expected to issue interim recommendations tomorrow, indicating that the summer's protests were justified and placing much of the blame on government regulators.

The cost of living rose sharply over the past decade, and this burden was borne by the "one-third of the public" - the third that works, serves in the army and pays taxes.

The committee, headed by Prof. Manuel Trajtenberg, will recommend measures intended to reduce the financial burden on the middle class, including far-reaching fixes for fundamental economic flaws.

These reforms are expected to create rippling shock waves, although it's not clear whether they will actually achieve their goals: They don't address the large profits retailers make at consumers' expense. Due to the high mark-ups, consumers never see many of the low import prices. It is not clear whether any recommendations will explicitly address retailers such as supermarket chains, which are responsible for a considerable portion of the high cost of living.

The committee found that consumers pay NIS 10 billion a year due to the concentrated nature of three sectors alone - the banking sector, the energy sector and the transportation sector. Of that sum, NIS 8 billion is due to banking.

The price increases over the past decade stemmed from an ongoing regulatory failure on the part of the government, and the highly concentrated nature of a range of sectors, including banking, pension saving, food, cement, public transportation, vehicles, gasoline and cooking gas, the committee found.

Between 1999 and 2010, the average Israeli family's expenses increased by 44%, from NIS 9,345 to NIS 13,496. For many items, consumers are paying more than their peers in western countries.

Sources close to the committee said the recommendations would cost NIS 3 billion to NIS 3.5 billion a year over the course of five years. Since the committee has insisted on not expanding the government budget, most of that money is likely to come from a cut to the defense budget and from taxes the Defense Ministry is expected to pay. If the full sum is not found, then the recommendations would be implemented over a longer time frame.

A subcommittee examining competition within the Israeli economy is expected to recommend reforms for sectors with minimal competition, including construction, vehicles and gasoline.

The economy's current structure institutionalizes the lack of competition, and the government helps monopolies and oligopolies maintain their status in a host of sectors by protecting them from competition through laws and import duties. Reforming this does not require money, just changing legislation and regulation, the committee found. These reforms could significantly decrease the cost of living relatively quickly.

The committee also wants to increase taxes on the highest tax payers and on corporations, contrary to Prime Minister Benjamin Netanyahu's plan to cut taxes. It intends to call for adding an income tax bracket for higher wage-earners, with a marginal rate of 48% or 49% on salaries above NIS 40,000 or NIS 50,000 a month, as well as a 2% to 3% surtax on particularly high salaries, higher than about NIS 1 million a year. Currently, the highest tax bracket is 44%.

The committee rejected proposals for imposing an inheritance tax.

Other tax-related proposals include raising corporate taxes to 25% or 26% next year, and cracking down on high-earning individuals who open companies in order to avoid paying National Insurance, health and income tax.

The committee also wants to make more rental apartments available at prices lower than the current rates, most likely through the real estate reforms Netanyahu is promoting, and to make it easier for parents with small children to work by offering them free day care.

The cost of protection

The government is responsible for the high cost of living in at least two regards - Israelis pay more than their peers in other countries for products that enjoy government protection, and they also pay more for services that the government at least partially covers. For instance, olive oil was more expensive in Israel than in other countries studied by the committee. Other products that enjoy government protection, generally in the form of import duties on foreign competitors, include fresh chicken, pasteurized milk, yogurt, milk chocolate, coffee, beer, yellow cheese and apples.

The committee found that for products protected by the government, costs consistently increased for consumers more than they did for manufacturers. However, in fields that were fully open to competition from abroad, such as clothing and shoes, prices increased for consumers less than they did for producers.

Other major costs facing consumers include services that are at least partly covered by the government, including day care and schooling, tuition, medication and other medical expenses.

Between 1999 and 2010, expenditures on households' single largest expense - housing - increased 68.9%, mostly due to price increases and improved home quality. Transportation and communications expenses increased 45.7%, mostly due to the increased price of vehicles. Health costs increased 81.2%, due to the rising prices of medications and insurance; home maintenance costs increased 50.4%, mostly due to the increased price of electricity, arnona property tax and cooking gas; and education and culture expenses increased 40.1%, mostly due to the increased cost of day care, dorms, school costs and tuition.

In addition, foods not including fruit and vegetables increased 32.9% in price, and fruits and vegetables went up 25.8%. The price of clothing and shoes increased only 2.5%, however, while furniture decreased 7.8%.

Regulators do not adequately consider the public interest, the committee found. Regulation is set by Knesset members, ministers and government clerks. Forced to consider the interests of the public and the interests of lobbyists, these decision makers do not always strike the proper balance between the two, Trajtenberg's team stated.

For instance, the team found that while the Industry, Trade and Labor Ministry effectively regulates the price of bread, it does not respond appropriately to Finance Ministry demands that it lower the price of cement. Basic bread products are produced by a handful of bakeries, while cement is produced almost entirely by Nesher, owned by the powerful IDB group.

Regulation is also not effective in fields such as banking, cellular communications and insurance, all of which lack competition, the committee found. However, determined regulators are effective despite the pressures they face, it stated.

Protecting the public

In order to address these issues, the committee wants import duties to be cut to zero in two stages, more staff to be hired at the Antitrust Authority, and for regulators' mandates to be changed to include protecting the public good.

The plan for cutting import duties calls for slicing these taxes to 6% at first, and then examining the effect on the market. Companies that control more than 30% of a given market - Tnuva and the cheese market, for instance - would not be permitted to receive the reduced import duties.

In addition, the committee wants to bolster consumers' strength by not taxing personal imports of products worth up to $300.