Analysis |

Lieberman's Plan Might Do the Opposite of What It Intends

The tax benefits will put more money into consumers' pockets, which instead of lowering the cost of living, may raise it

Sami Peretz
Sami Peretz
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Foreign Minister Yair Lapid, Prime Minister Naftali Bennett and Finance Minister Avigdor Lieberman at the press conference on Wednesday.
Prime Minister Naftali Bennett and Finance Minister Avigdor Lieberman at a press conference on Wednesday.Credit: Ohad Zwigenberg
Sami Peretz
Sami Peretz

The quick plan cooked up at the treasury and presented Wednesday night by Prime Minister Naftali Bennett and Finance Minister Avigdor Lieberman is meant first and foremost to prevent public unrest. While we haven’t seen the public go out to protest or pitch tents on Rothschild Boulevard, Bennett and Lieberman still realized that the intensive media coverage of the wave of price hikes might develop into public rage threatening the government’s stability. So they applied heavy pressure on the bureaucrats at the Finance Ministry to come up with a quick fix to reduce the pressure. But a fundamental part of the published plan will not reduce the cost of living at all, and might even cause further price increases.

I refer to two sections of the plan – one that gives credit points to families with children ages 6-12, which will see their income increase by 223 shekels ($71) per month, and another that gives a 20-percent increase in the work benefit (negative income tax) to workers with monthly incomes under 6,200 shekels.

One explanation for the global inflationary rise and our own price hikes has to do with available income: During the COVID crisis governments distributed immense sums of money to the public (unemployment and furlough benefits and business grants), and so did the central banks, which lowered interest rates while large swaths of the economy were hobbled or even shut down completely. This left the public with income saved due to the closure of entertainment venues, and when the lockdowns ended, the public increased consumption of all kinds by a great deal. The result: price hikes.

The increased available income of some 800,000 families will likely be directed toward consumption, and the retail chains can only say hallelujah. Rather than dealing with prices, the government is putting some more spending money in citizens’ pockets. The cost of the credit points section is 2.1 billion shekels – half the cost of the entire plan.

The section more relevant to lowering the cost of living is the reduction of customs taxes on a series of goods, from meat and olive oil to furniture, kitchenware and of course electricity. Only three weeks ago a decision was made to raise electricity prices by 5.7 percent, which was explained by the rise of expenses in power generation, and now, lo and behold, a formula has been found to raise the rate by only 3.4 percent. Could more vocal public pressure, not just media pressure, have yielded an even greater reduction? Possibly. In recent weeks the treasury has considered having the state absorb some of the rise in fuel costs, but here the forces of populism broke against a determined stand by the bureaucrats, who made it clear: Cheaper fuel means giving an incentive for more private car travel, and when trying to control public rage, making traffic gridlock even more miserable is the last thing you want to do.

Lieberman and Bennett know full well that this plan will not significantly reduce the cost of living, which is why the finance minister also made it clear at the press conference that this “isn’t the last package.” This does indeed look like a small sedative meant to make the public happy for a while, but it won’t move the needle in the true struggle: to reduce the 20 percent gap in the cost of living between Israel and other developed countries.

It is doubtful whether these steps will stem public criticism, but at least they calm the importers, retailers and manufacturers. They aren’t the target of the plan and have nothing to worry about at this point. But just so they don’t see the plan as carte blanche to raise prices immediately, Lieberman mentioned that he intends to form a committee to look into centralizing the food sector. This is the right call, and it may mesh with the investigation that the Antitrust Authority has been conducting into several suppliers and the major retailers on suspicion of cartel arrangements. If the investigation is undaunted, and if the committee to examine the centralization in the food industry is effective, this will be Lieberman’s true contribution to reducing the cost of living. Until then, the public has a few more shekels to spend at the supermarket.

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