Israeli Finance Minister, Arye Dery Reach Deal to Cut Water, Transportation Prices

Two ministers promise 17% reduction, but shekel amount set aside for it points to prices being trimmed by 14.5%.

Arye Dery, left, and Moshe Kahlon announcing the price cuts, December 27, 2015.
Emil Salman

The price of water and public transportation will be cut sharply, taking effect next year, after Finance Minister Moshe Kahlon and Arye Dery, minister for Negev and Galilee development, reached a compromise agreement Sunday.

The two had been at odds over the reduction, with Dery demanding the government abide by promises his Shas party had made to voters in last March’s election to exempt water and public transportation from the 17% value-added tax. Kahlon and the Bank of Israel were equally committed to the principle that Israel would not create any more exemptions to VAT.

In the end, the two agreed to lower prices for water and public transportation by an amount equivalent to VAT, although in practice the reductions will probably be lower. While the headline figure both sides talked about was 17% – and sources close to the minister insisted that would indeed be the size of the cut – the real reduction will likely be in the order of 14.5% given the budgeted amount.

The reduction will be written into law, a process that will take several weeks to complete, but is a condition Dery insisted on.

“These arrangements will be legislated so that it will be impossible to rescind them – in other words we’re promising that the reduction will remain in place for many years to come,” Kahlon said. “At the same time, we’re preserving the Israeli tax system and avoiding undermining the single VAT rate.”

Dery expressed satisfaction, too. “Semantics don’t interest me, but first and foremost the interests of the weakest segments of the population will get the reduction at once,” he said, adding: “Regarding electricity, I agreed with Kahlon that the next tariff reduction will be for needy families only.”

For Israelis’ water bills, the reduction will work out to just a few shekels per person every month. In addition, Kahlon and Dery have yet to devise a mechanism for compensating the water companies and local authorities, which will cost them about 1 billion shekels ($257 million).

Kahlon and the central bank opposed exempting transportation and water from VAT, saying it set a bad precedent for further exemptions that would encourage tax cheating and complicate the collection process. Right now, the only exemptions on VAT are for fresh produce and goods and services bought in the resort town of Eilat.

At a meeting of the Likud faction on Sunday, other ministers, also opposed the principle of exempting goods or services from VAT, including Yuval Steinitz, a former finance minister and now energy minister. But Culture Minster Miri Regev, who had fought unsuccessfully in the last government for water and power-rate cuts, gave her backing. “We’re lucky you weren’t appointed finance minister in the current government or we wouldn’t be taking social initiatives,” she said, indicating Steinitz.

Dery had sought reductions that would have cost the budget 1 billion shekels, but Kahlon had sought to limit the cost to 680 million shekels. That heaves the treasury with 320 million shekels to come up with from the 2016 budget. Kahlon and Dery are charged with identifying where the money will come from either budget reserves or from cuts elsewhere.

In the case of public transportation, the reduction in fares will be the equivalent of VAT, but on water rates the cut will only be made on the basic rate that covers the first 3.5 cubic meters per person, so that the reduction will not be that significant.

Water companies may end up making up the reduction, which will cost them about 300 million shekels annually, by raising other charges unless the government agrees to subsidies, sources said. Water rates are set according to the cost of pumping, desalinating and piping it, so any rate reduction has to be covered elsewhere.

For the public transportation cut, the government will have to provide 650 million shekels of subsidies annually to bus operators, Israel Railways and light rail systems in Jerusalem and eventually Tel Aviv.