Prime Minister Benjamin Netanyahu
Prime Minister Benjamin Netanyahu at a cabinet meeting on the 2011-2012 two-year budget and economic plan on Sunday June 27, 2010. Photo by Emil Salman
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The public will pay more once again: The Finance Ministry is proposing raising taxes by NIS 5.4 billion in 2011 and by another NIS 3.4 billion in 2012, in order to keep the proposed two-year state budget within its deficit guidelines.

The treasury presented its recommendations for the 2011-2012 budget to the cabinet yesterday, which include steep increases in taxes on gasoline, alcohol and cigarettes. The Finance Ministry plans to keep VAT at its present level of 16% despite promises to reduce it to 15.5% on January 1. It also wants to renege on its commitment to restore to the 2011-2012 two-year budget several National Insurance Institute benefits.

The treasury has said that if taxes don't rise or the defense budget is not cut it will have no choice but to cut social and welfare funding, including education and health care.

Other possible ways to raise taxes under consideration include levying VAT of 7%-8% on fruits and vegetables, a step that the Knesset shot down last year; and canceling the VAT exemption in Eilat, another step that ran into stiff political opposition.

Income tax cuts still in the works

Another possibility being examined is raising National Insurance payments for high-earners.

The cabinet will vote on Finance Minister Yuval Steinitz's proposed economic plan and budget on July 15.

The proposed budget does include an increase of NIS 8.7 billion in spending for 2011 and NIS 7 billion for 2012, but the figures are misleading. The 2011 budget hikes include additional funds to cover population growth and spending mandated by law. When these are factored in, there is a need to cut elsewhere, as these additional amounts - what is called "automatic pilot" - eat up the entire budget increase and more. The increase needed just to keep up with population growth and the new laws passed by the Knesset is NIS 12.6 billion for 2011, well over the NIS 8.7 billion in additional spending proposed by Steinitz. Hence the need for a budget cut and/or tax increases.

Cabinet to vote on 2011-2012 budget on July 15

The treasury forecasts used to build the budget include a 2.66% increase in the budget over 2010, tax revenues of NIS 231.1 billion, and a 3% budget deficit. The treasury's proposal is for NIS 3.9 billion in cuts and NIS 5.4 billion from higher taxes.

But the treasury says that together with the tax hikes, defense spending must be cut because the defense establishment has received more funds than originally budgeted for in recent years.

The Finance Ministry is unwilling to give up on its multi-year plan to lower direct taxes, such as income taxes, regardless of the need to raise other taxes. It will continue its plan to reduce income and corporate taxes over the next two years.

The ministry says its plan is similar to that of Britain, which is also raising indirect taxes while continuing to cut corporate and income taxes.

Gasoline prices are expected to rise sharply in 2011, bringing in another NIS 1 billion, say Knesset sources. Last year the government raised gas prices by 30 agorot per liter, which also increased tax revenues by about a billion shekels.

Increasing cigarette taxes last year by NIS 2 per pack raised NIS 700 million.

Prime Minister Benjamin Netanyahu refloated a few months ago the idea of levying VAT on produce, to require the sector to start reporting its sales to the VAT authorities in an attempt to cut back on possible tax evasion. It is still not clear whether Netanyahu and Steinitz will include this proposal in their final version of the Economic Arrangements Law.

As to charging VAT in Eilat, the treasury regularly raises this possibility and in the end retreats under pressure from MKs, usually in return for their support for other taxes.

'We must keep to the deficit limit'

"We are in an environment of economic uncertainty today as a result of the global crisis that has still not passed," Steinitz told the cabinet. "Despite Israel's dealing with the crisis with relative success, we must continue and preserve the fiscal rules that we have set for ourselves as expected from responsible leadership," he added.

Steinitz said despite the additional funds for various ministries, the government must keep to its deficit target of 3% in 2011 and 2% in 2012 as a safety cushion in case the crisis worsens. "All over the world they are cutting the budget, lowering wages and raising taxes," said Steinitz.