On Sunday, 17,000 truck drivers and haulers will turn off their engines across the country. This is their reaction to the government's decision to raise the duty on diesel. The truck owners claim that they cannot even afford to fill their tanks, as they cannot pass the duty increase onto their customers through price rises. The taxi drivers' association threatens to set higher tariffs, while Oded Tyrah of the Manufacturers Association has called on the government to cancel the duty hike for the entire private sector.
Raising excise duty by 30 agorot per liter for diesel and oil is indeed a grave error. Finance Minister Benjamin Netanyahu's strategy has been, since taking office, to push taxes down. He has repeatedly said that from January 2004, income taxes will come down, and in January 2005, they will fall further. His staff has promised that there will be no new taxes.
And in order to convince the public that he seriously means to cut taxes, he first had to convince them that he plans to reduce government spending, because without cutting government spending, you cannot reduce taxes permanently.
And this is why Netanyahu rejected the bad advice from some sources to increase government expenditure - or rather, to spend our way out of the recession. This is an old-fashioned Keynesian approach that no longer washes with the public. Japan tried it and it didn't work. Now, after enormous effort, Israel's general public has begun to believe that Netanyahu means what he says, interest rates have fallen, and private consumption is rising.
The treasury's accountant general, Yaron Zelekha, believes that consumer spending is the major engine of growth for the economy. It acts fast (unlike investment or exports) and directly impacts on the cogs of trade, which, in turn, make the gears of production revolve in the private sector and for small employers, who then take on extra workers - and hence unemployment falls. Zelekha is unfazed by the claim that increased consumer spending raises the deficit on our balance of trade, pushes up external debt and brings on depreciation, because he thinks that the country's problem is currently not our balance of trade, but a more pressing one of unemployment.
Zelekha has recently been working on the plan that pushes up take-home pay for a worker on NIS 3,000-8,000 gross a month by NIS 100-200. This plan is meant to take effect in 2004 and will cost NIS 2 billion. It raises disposable income, and therefore moves toward the same direction as boosting private consumption.
Now this is where the big mistake occurs.
Raising excise duty turns that public faith on its head and increases uncertainty, because if Netanyahu is raising taxes after all, who says he won't carry on doing so and raise them again next year?
And if the aim is to encourage economic activity and employment, then how does that sit with the implied higher costs? Because every item has a haulage component, and when that bit becomes expensive, production costs go up and people lose jobs, and disposable income drops. Now where's the sense of giving NIS 2 billion with one hand, and taking NIS 700 million with the other?
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