Netanyahu Launches Election Campaign With Call for Zero VAT on Basic Foods

Prime minister stresses wider benefits from exempting food instead of housing, as rival Lapid had planned

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Prime Minister Benjamin Netanyahu, November 2014.
Prime Minister Benjamin Netanyahu, November 2014.Credit: Alex Kolmonski (Pool)

Kicking off his election campaign on Monday, Prime Minister Benjamin Netanyahu promised he would act to exempt basic food products from the 18% value-added tax and double the grants awarded to newly demobilized soldiers.

Speaking at a business conference sponsored by the financial daily Globes, Netanyahu’s plan was short on details. However, he did say it would include basic foods whose prices are subject to price controls and would cost the treasury no more than 2 billion shekels ($500 million) in lost tax revenues.

The prime minister made a point of stressing the differences of his VAT-exemption plan to the one Yair Lapid had proposed – exempting many first-time buyers of new homes from the tax – before Netanyahu dismissed him as finance minister last week.

“This is a benefit that will reach millions of people. It addresses people’s most basic needs – bread, milk, eggs. This plan will enable them to save hundreds to thousands of shekels every year. It’s a 15% reduction on prices for price-controlled food, and all of the savings will go to consumers,” Netanyahu said.

Exempting new homes from VAT would help no more than 14,000 people, most of them with middle or higher incomes, he said.

Netanyahu also told the Globes conference he wanted to increase the grant to newly released soldier to 60,000 shekels ($15,000).

Lapid responded that Netanyahu had never proposed either a VAT exemption for food or increasing grants for soldiers while the two were in government together for 18 months.

“Mr. Netanyahu has a clear strategy about the elections,” Lapid said. “His basic assumption is that the Israeli voter, the Israeli citizen, is a 4-year-old. Only two things work on 4-year-olds – sweets and intimidation. Every election, he promises them sweets he won’t deliver, while saying there are enemies all around and only he can save us.”

Netanyahu’s plan quickly came under fire not just from Lapid but by Tax Authority officials, who said eliminating VAT on basic food would deprive the government of billions of shekels in tax revenues. Speaking on condition of anonymity, they noted that total revenues from VAT on food amounted to 9 billion shekels.

Officials cited a 2013 study that was prepared for an abortive proposal to exempt VAT on a longer list of basic food items – including goods like hummus, tomato paste, white and yellow cheese, baby food and even carp. That study estimated the lost tax revenues at 5 billion shekels.

Although fresh fruit and vegetables, as well as products and services sold in the southern resort town of Eilat, are VAT-exempt, in principle treasury and tax officials oppose differential VAT rates. They say that even exemptions for items like basic food tend to help the highest income earners the most, as they spend much more on food than lower-income families.

Anyway, they added, VAT exemptions usually don’t end up getting fully passed on to consumers, with each one percentage point drop in VAT yielding a decline of 0.5-0.6 of a point in food prices.

Meanwhile, sources close to the prime minister said he would hold onto the finance portfolio at least until the Likud party primary, currently slated for January 6. Netanyahu may even continue serving as acting finance minister until a new government is formed, they said.

Netanyahu is undecided for now. On the one hand, the treasury – with the 402 billion-shekel budget for 2014 that it controls – gives him vast power while the campaign is on; on the other, it would add to the weight of responsibilities he has to shoulder.

In all events, Harel Locker – the director general of the prime minister’s office who announced last month that he is to step down, would play a major role in treasury policy as long as Netanyahu holds the portfolio.

The prime minister doesn’t want to appoint an interim finance minister to avoid resentment inside Likud ranks by whoever doesn’t get the job. However, he might reconsider that, said the sources, who asked not to be identified.

Netanyahu’s top choice for the portfolio is Transportation Minister Yisrael Katz, who in recent months has emerged as a close ally. Netanyahu might award Katz the Finance Ministry before the primary if he thinks it will help Katz’s campaign.

Yuval Steinitz, another Netanyahu ally who served as finance minister in the prime minister’s previous government, is considered a second choice right now.