Hirchson Unveils Plans to Cut VAT by 1%

Finance Minister Abraham Hirchson intends to present a proposal to Prime Minister Ehud Olmert on Sunday to lower value-added tax by one percentage point, from 16.5 percent to 15.5 percent, associates of Hirchson said this week.

The reduction, which Hirchson plans to implement "soon," will reduce the state's tax revenue by NIS 3.3 billion per year.

The Finance Ministry is currently working on the state budget for 2007, and officials there are very worried. The demands posed by the various ministers are huge. Each is putting forth programs that cost billions of shekels, and each MK has numerous ideas for expanding budgetary outlays. All the lobbies are stepping up their activities, and later this year, a public-sector salary deal will need to be signed, a fact that is very worrisome to the treasury's budget division.

In internal discussions on the budget, Hirchson has assured ministry officials that despite these pressures, he does not intend to exceed the budget ceiling either for next year or for those following it, just as he withstood pressures to expand the 2006 budget. The coalition agreements state that the 2007 budget will rise by 1.7 percent in comparison with that of 2006, but Hirchson would like to see a smaller increase, between 1 and 1.7 percent, associates said.

He also plans to gradually lower the deficit, with the aim of reaching a fully balanced budget by 2009.

Following are Hirchson's comments on several key issues, as reported by close associates:

b Lowering taxes or shrinking the debt. To address this dilemma, Hirchson used a medical example: "One headache pill is good, but 20 can be lethal, which means that everything is a matter of quantity." In economic terms, he said, it is clear that both the debt and taxes need to be lowered, but this must be done in the right balance. The finance minister would like to lower debt to 80 percent of gross domestic product by 2011, compared to 100 percent today.

b The price of bread. Hirchson was not pleased with the unilateral decision by Industry, Trade and Employment Minister Eli Yishai, who signed an order this week reducing the prices of all price-controlled breads by 4 percent. Olmert had raised the prices of such breads by 7.1 percent a month ago.

The finance minister told aides that "Eli Yishai cannot take such populist action, which contradicts the professional advice of officials in his ministry."

b The Israel Electric Corporation. Hirchson intends to carry out previously approved reforms of the IEC to the letter and by the book. To accomplish this, he will set up a special task force representing the key players: the Finance and Infrastructure Ministries, IEC's management, the IEC workers' union and the Histadrut labor federation.

"The aim is to divide the IEC into three companies ? production, delivery and distribution, then to introduce competition, and finally to privatize," Hirchson said.

The finance minister told aides that Infrastructure Minister Benjamin Ben-Eliezer agrees with him on the reform.

b Excessive wages at the Bank of Israel. Hirchson feels sorry for Bank of Israel Governor Stanley Fischer, who was appointed to deal with monetary issues and is stuck with the issue of enormous salary excesses at the institution. "He can close deals abroad that no one can," Hirchson said of Fischer. "He did not come to Israel to deal with wages."

However, Hirchson insists that any solution must deal with the excess wages paid in the past as well as future payments. The central bank's management disagrees.

b Interest rates. Hirchson does not favor raising interest rates under current conditions, even if rates are raised in the United States. But the finance minister was quick to point out that "the decision rests with Governor Stanley Fischer."

b Educational reform. Education Minister Yuli Tamir "must present her program to me, explain where the money is going and what each pupil will receive in terms of education. After I study the program, I will express my opinion," said Hirchson, who is displeased at the many plans being put forth.

b Reducing poverty. According to Hirchson, the solution is two-pronged: get people working and improve education. He is in favor of subsidizing services such as day care and transportation in order to allow couples to work. He also wants to encourage Arab women to enter the work force by setting up factories in Arab villages.

b The Budget Law. Hirchson wants a law requiring the budget to be passed by December 31 each year. Currently, the government has until March 31 of the following year to pass the budget, and often, the budget does not pass until shortly before this deadline.

b The defense budget. The finance minister would like a multiyear plan for cuts in the defense budget, which he believes would allow for greater efficiency without undermining effectiveness. He would also like to see services such as health care for the troops privatized.

b Open Skies. Hirchson said that an Open Skies policy is essential to expand tourism and create more jobs. He promised to do all he can to convince Transportation Minister Shaul Mofaz of the need to cooperate in this endeavor.

b Israel Military Industries. The minister favors privatizing IMI. The company and its workers have received billions over the years, he said, but nothing came of it.

b The Israel Lands Administration. "The administration is functioning as it did 50 years ago," Hirchson said. "Therefore, it needs a major reform that will do away with bureaucracy and grant greater access to the public."