Israel has veered off track in its efforts to encourage capital investment, a leading adviser to Prime Minister Benjamin Netanyahu said on Friday. The economist, Uri Yogev, who is an adviser to Netanyahu on efforts to form a new coalition government as well as on economic development policy, was part of a panel of economists at a program in Tel Aviv.
“We have a rare opportunity to deal with the issue,” Yogev said. “There’s a crisis, a new government that will be formed and good people who can do it,” he said, specifically expressing the hope that tax exemptions would be eliminated.
Another panelist, Avi Ben-Bassat, who is an economics professor at Hebrew University of Jerusalem and a former director general of the Finance Ministry, expressed similar sentiments: “The law for the encouragement of investment does not provide incentives based on innovation but rather based on exports. Most foreigners who invest in enterprises in Israel buy existing plants and don’t build new ones. There was no need to give Intel NIS 600 million. As far as I am concerned, they can build the plant in Ireland,” he said in reference to a new chip plant that the company recently decided to build in the Irish Republic.
“Going into a crisis with a 4% deficit and full employment is worrying,” Yogev said, “so reforms are necessary. The mix needs to be more cuts in government spending than in [generating new tax] revenues. All kinds of infrastructure needs to undergo a major revolution and the political situation currently makes that possible.”
All of the panelists, Yogev, Ben-Bassat and economist Shlomo Maoz, agreed that current policies cannot continue in light of the large government deficit. The difference of opinion among the speakers lay in where to make cuts.
Ben-Bassat, suggested that two-thirds of the spending shortfall be addressed by raising taxes with the other third coming in the form of spending cuts. He cautioned against raising the value added tax rate but pointed to huge sums that are being lost to the state treasury through what he deemed unjustified tax exemptions that he said are costing the state NIS 39 billion a year.
Ben-Bassat called for the repeal of export incentives, saying there was no reason to discriminate against those companies producing for the local market in favor of those producing for export. He also suggested scrapping the tax exemption on so-called continuing education funds, a popular savings plan for employers that does not actually require that the money withdrawn from the funds be used for educational purposes. The current policy of exempting purchases made in Eilat from VAT should also be eliminated, he said. “There’s no reason to promote Eilat over Tiberias.” When it comes to transportation projects, however, Ben-Bassat said the priority should be the Tel Aviv area, saying that is where the most acute problems with transportation infrastructure exist.
Maoz said that red tape and the burden of regulation had to be addressed. He also warned about the potential of future emigration from Israel. “When the United States comes out of the economic crisis and the recession in 2017, there will be 20,000 new emigrants. If we don’t help the younger generation with everything related to housing in Israel, and invest in professional education, research and development, in another few years we will lose in the competition with the world. Multinationals will flee from here along with our children,” he said.