Lapid Cancels Income Tax Hikes Slated for 2014

Finance Minister cites surprise fiscal windfall, but say he also plans to cut NIS 3 billion in spending and limit future growth.

Finance Minister Yair Lapid announced at a news conference late yesterday that the increased income tax rates slated to go into effect in January will be rescinded as the government has found itself with an unexpected surplus of budgeted funds.

Lapid said he was ordering the increases one to two percentage points in the personal income tax rate to be cancelled, a move that will deprive the treasury of some NIS 3.6 billion in revenues next year.

The finance minister emphasized that the move was done in coordination with Prime Minister Benjamin Netanyahu as well as Eugene Kandel, the chairman of the National Economic Council, and Bank of Israel Governor Karnit Flug, before he held yesterday's press conference.

He defended the decision – as against other options in the face of the fiscal windfall, such as increasing spending or waiting to act until the budget picture becomes clearer over the next months – by saying that government spending was expanding too quickly.

Government spending should not grow faster than 1.7% annually, the same rate as Israel’s population is growing, Lapid said. Right now, however, current regulations enable the budget to grow 2.7% every year, he said.

“The current regulation expands government spending disproportionately, and we must change it to avoid tax hikes in 2015,” Lapid told the news conference.

In parallel with rolling back the planned tax hike, Lapid said the treasury was considering cutting government spending next year by some NIS 3 billion “to insure that the income tax reductions don’t undermine the stability of the economy.”

The finance minister asserted that cutting spending would not impinge on government services. “The government can be more efficient and provide the same services it does now with less money. We know how to do this with the aid of reduced budgetary reserves and by adjusting the budget for interest [payments],” he said.

The government has enjoyed an unexpected fiscal windfall this year as tax collections have exceeded the forecast contained in the 2013 budget while spending by ministries has been under the knife. As a result, the budget deficit is likely to be just 3.5% of gross domestic product this year, far below the 4.65% projected in the spending package when it was approved last summer.

“Eight months after the government was formed and six months after the Knesset approved the budget, it is time to re-assess the situation,” Lapid said. Tax cuts will give Israel’s middle class more purchasing power, he added.

Lapid’s Yesh Atid Party emerged the second-largest party in the Knesset in this year’s election on a campaign promising to help the country’s beleaguered middle class. But his popularity in the polls has plummeted since he took over the finance portfolio and pushed through a package of tax increases and spending cuts in a bid to close what treasury officials said was a dangerously big fiscal hole.

Although Lapid stands to benefit politically from the move, he said the decision on rescinding the tax increases, as well as the NIS 3 billion spending cut and plan to restrain future government spending, was taken after lengthy consultations with top treasury officials in recent weeks, with the Prime Minister’s Office and the Bank of Israel party to the discussions.

The steps, he predicted, would help spur higher economic growth in 2014. “When I entered politics I said to myself that the good of the country comes before my personal good,” he declared.

Defending the zigzag in fiscal policy, Lapid said the decision to raise taxes six months ago was correct under prevailing conditions; the decision to reverse the hike is correct given the unexpected increase in 2013 tax revenues, which include a one-time take of more than NIS 4 billion from taxes collected on so-called “trapped” corporate profits this year.

Finance Ministry director general Yael Andorn, who was at the news conference, said that the treasury’s job is to ensure that the budget is efficient and not wasteful.

As a result of the yesterday's decision, the tax rate for wage earners making up to NIS 5,280 a month will be 10%, and not 11% as originally planned. The marginal rate for incomes of up to NIS 9,010 will be 14% and not 15% and for those earning up to NIS 14,000, 21% rather then 22%.

For incomes of up to NIS 20,000 a month the rate will stay at 31%, instead of rising to 32.4%. The tax rate on monthly incomes of up to NIS 41,830 will remain 34%, rather than going up to 36%, while those who earn up to NIS 67,630 will continue to pay 48%, rather than 50% income tax.