Israel's Middle Class to Feel the Brunt of Lapid's 'Budget of Hope'

The 2013-2014 budget includes a 1.5 percent increase in come tax rates, a NIS 7 billion cut in government spending for the remaining year and a rise in VAT.

The Finance Ministry released the 290-page 2013-2014 budget on Tuesday, calling it a “a budget of hope.” The most onerous items include a 1.5 percent increase in income tax rates, a NIS 7 billion cut in government spending in the remaining months of 2013 and another NIS 18 billion next year. VAT will rise 1 percent in June and children’s allowances will be cut to NIS 140 a month per child.

The total tax hike over the 2013-2014 period is expected to reach NIS 13.4 billion. Companies enjoying tax breaks under the Law for Encouraging Investment will be paying higher income tax rates as well as a five percent hike in taxes on dividends to 20%. Other cuts and revenue enhancers include canceling the exemption on VAT for tourists, canceling subsidies for after-school programs for children of working parents, raising taxes on lottery winnings and raising taxes on luxury goods. Various customs duties, such as on imported textiles and fish, will also be increased. Stay-at-home mothers will pay health taxes and National Insurance Institute contributions.

What the budget does not include, despite preliminary discussions, are the cancelation of the VAT exemption in Eilat, taxes on advanced training funds ‏(kranot hishtalmut‏) and VAT on fruits and vegetables.

The budget book starts with an introduction that it seems was written by Finance Minister Yair Lapid, or at least under his inspiration. The preamble begins: “The state budget does not deal just with numbers, cuts, taxes and reforms. These are the small details that make up a much bigger picture. A budget with a real worldview behind it will become a guide, a tool that defines priorities, the designer of a humane society.”

“On one hand, the budget includes the largest cuts in the history of the country ... This is a painful cut, intended to return Israel to the path of fiscal restraint. It corrects decades of structural distortions, creates a feeling of equality and is directed at the good of the working person,” states the introduction to the budget.

Later it attempts to explain, in a somewhat forced manner, the vision behind the tables.

The proposed budget is expected to undergo a number of changes before it is passed into law. It first goes to the cabinet and then to the Knesset. The cabinet will hold its first session on the budget next Monday, and is expected to continue on Tuesday.

The Knesset will receive the Budget Law along with its accompanying Economic Arrangements Law by June 10. After the two bills’ first readings, parts will move into various committees, though the vast majority of the work will be done by the Knesset Finance Committee. The Knesset must pass the budget by July 31, or a new election will be called.

A number of issues are expected to face stiff opposition in the Knesset, and will most likely not pass in their present form. For example, many MKs say the across-the-board 1.5 percent income tax hike will have to modified, for example by making it more progressive. In addition, the proposal to cut funding subsidies for after-school programs for children is likely to be canceled.

Other problems lying in wait include the defense budget. The page dedicated to the defense budget in the budget book was left blank, though later the treasury added some information to its website on the matter. It seems Lapid had planned on reaching an agreement with Defense Minister Moshe Ya’alon before the budget’s publication, but this did not happen. The Finance Ministry intends on cutting the defense budget by NIS 5 billion over the next year and a half, and this will probably be the first point where Lapid’s “new politics” meets the old. The Defense Ministry is actually asking for more, not less, and ultimately, as in previous years, the prime minister will have to intervene and settle the matter.

Implementation of a long school day throughout the country will be postponed − once again − until the end of the decade.

The treasury says it has built the budget with a number of principles in mind, including one of the most important: Encouraging Israelis to go out to work. But it seems Lapid also was unable to withstand the pressure from a number of interest groups, such as the Histadrut labor federation.

The treasury’s efforts to rein in the deficit will not spare the health system, and the public will probably have to pay more for doctor and emergency room visits and medical equipment, according to a draft budget discussed Tuesday. If it passes, Israelis are may also suffer reductions in their supplemental health insurance coverage, and will not see any new drugs or technologies added to the state-subsidized health basket this year.

Health care professionals are fuming about the cuts being considered in the state budget and the economic arrangements bill. According to the draft budget released Monday evening, co-payments for medical treatments covered by the public health basket will be raised to the tune of NIS 200 million. This means patients will be paying more for doctor’s visits, trips to the emergency room, medicines and equipment such as hearing aids.

Under the proposal, Health Minister Yael German will be asked to determine exactly which co-payments will be raised, but the per-family co-payment ceiling will not be increased. The draft budget document explains that low co-payments “are liable to lead to an uncontrolled rise in quantities because insurees do not internalize the costs.”

Raising the co-payments will lead to a drop in the health tax budget, which is transferred from the National Insurance Institute to various health maintenance organizations.

The plan has generated sharp criticism among senior health officials, who Tuesday convened in German’s office to discuss its ramifications. “This is a scandal,” said Shmulik Ben Yaakov, chairman of the Society for Patients Rights in Israel. “If there is one issue about which there’s a consensus in the health system, it’s the need to reduce the co-payments. Raising them will harm the weaker population of sick people, who will stop going to the doctor, buying medicines and getting treatments because they won’t have the money.”

The draft budget also cancels the plan to raise to 14 the age under which dental treatment will be given at public expense. Instead, subsidized dental treatment will continue to be given until age 12 for the next two years. The proposal would also require housewives to start making the minimum health insurance and national insurance contributions, which are NIS 101 and NIS 61, respectively. Housewives are currently exempt from making these payments.

Past efforts to impose the health tax on housewives have met stiff resistance from the Coalition for Public Health − comprised of patient groups and human rights organizations − on the grounds that such a tax would contradict the social-welfare dimension of the health tax.

“It’s logical that if there’s no money, the health tax should rise,” said Ben Yaakov. “But you cannot collect tax from someone who isn’t working.”

In addition, the draft of the economic arrangements bill that was distributed this week lacks a clause that had appeared in previous drafts regarding additions to the health services basket, which indicates there might not be any. Patients’ rights groups warn that if the basket isn’t updated in the coming year, there will be an intense struggle that will include demonstrations by patients and broad public protests. Drugs and technologies in the health basket are subsidized by the government, and new treatments are usually added annually. 

Emil Salman
Moti Milrod