Don't Be Fooled / The Government Spent Us Into This Crisis

The root cause of the need to hike taxes and slash at the budget cuts isn't the global malaise, it's local irresponsibility.

"We approved steps that will enable us to avoid deep deficits in order to preserve Israel's economy and jobs. These are responsible steps to protect the Israeli economy from the global financial crisis," said Prime Minister Benjamin Netanyahu on Monday after the Knesset approved his cutbacks.

First off, Netanyahu and Finance Minister Yuval Steinitz should be congratulated for enacting their plans to increase taxes and cut the budget (slightly). This was critical to prevent a financial crisis and Greek- or Spanish-style unemployment.

But we need to remind the prime minister and his finance minister that it's not the "global financial crisis" that's to blame for the need to institute deep budget cuts. The guilty parties are those who spent over budget during the last two years, and planned the 2012 budget with baseless optimism - based on a projected 9% increase in tax revenues.

If Netanyahu and Steinitz hadn't blown the budget, we wouldn't be facing such a large deficit and we wouldn't need to be raising taxes so sharply now and cutting the 2013 budget. Yes, the global crisis plays a role, but it's not the main culprit.

Another important decision this week was the timetable for the 2013 budget. Netanyahu and Steinitz agreed that the budget would receive cabinet approval by September 13, four days before Rosh Hashanah.

In other words, we can expect a hot month. If the ministers were screaming over the plan to cut NIS 700 million in expenses (which ultimately wound up as NIS 550 million ), you can only imagine what will happen when they're told they need to cut NIS 14 billion.

'Auto pilot' function

One of the riddles involving the 2013 budget is Steinitz's statement that government expenditures will increase on all sorts of good and important things. So how does that mesh with the need to cut NIS 14 billion?

The answer lies in the "auto pilot" function involving all the government's commitments next year, as well as the increases in things such as the number of children and pensioners. These commitments also include the generous salary deals the Finance Ministry signed, and higher expenditures on education, defense, infrastructure, the ultra-Orthodox and all the other ministries - for a total of NIS 27 billion.

But the law stipulates that the real increase in expenditures can be no more than 2.9%. The nominal increase is therefore 4.5%. Since this year's expenditures will total NIS 285 billion, then adding 4.5% works out to a NIS 13 billion increase. No more.

Thus the government needs to cut NIS 14 billion from its commitments to bring the budget within the framework permitted by law.

It's all politics

Finance Ministry budgets director Gal Hershkovitz wanted to cut NIS 700 million from the budget to keep it in check. But after the political give-and-take and concessions to Shas, Atzmaut and Yisrael Beiteinu, we now need to find another NIS 150 million because all that's been cut is NIS 550 million.

In internal discussions, Hershkovitz has said that if it turns out in a few months that this isn't enough and expenses are expected to be even larger, he'll carry out another budget cut. The law states the budget can't be more than NIS 285 billion. It's a good thing we have a law.

Alongside tax revenues, the original plan called for a NIS 14.4 billion budget cut, although that plan is now looking holier than Swiss cheese. The Finance Ministry proposed raising income taxes for everyone who earns more than NIS 8,880 a month, but Knesset Finance Committee head Moshe Gafni demanded that it apply only to people earning more than NIS 14,800 a month. Gafni insisted, so Netanyahu bowed, but gave credit to his party colleague MK Haim Katz instead of Gafni, so the public would know that Likud is a merciful, socially-oriented party. In any case, that compromise will be costing NIS 200 million a year.

Postponing the increase in value-added tax by a month will also cost the state NIS 400 million.

In addition, the revenues side of the equation includes two problematic items that are a crucial part of the plan to cut the deficit. First off is the plan to crack down on the underground economy and increase tax collection by NIS 2 billion. This won't happen unless the Knesset approves draconian laws to enable it. This would include giving the Israel Tax Authority access to police information on money-laundering investigations, letting it into citizens' bank accounts, permitting it to confiscate vehicles of people with unpaid bills and letting it block them from leaving the country. Would the Knesset approve this? Without the accompanying enforcement legislation, this item is meaningless.

Right or smart?

The second sticky item involves international corporations' captive profits. There's been a huge backlash against Steinitz's proposal to bring in NIS 3 billion in revenues from these companies. The Knesset plenum approved the first reading of a bill that would let these companies pay reduced corporate taxes for a year, on the condition that they withdraw their profits and pay up.

Opposition Knesset members slammed Steinitz for his proposal. Labor chairwoman MK Shelly Yacimovich asked how he could be giving discounts to the wealthiest companies. Meretz chairwoman MK Zahava Gal-On said this could be called the grand robbery bill, and Hadash MK Dov Khenin said only the wealthy were getting free lunches.

But the problem is a bit more complicated. The issue at hand involves about 10 companies that pay reduced corporate tax rates under the old law for encouraging capital investment. These companies can choose not to pay taxes at all simply by not withdrawing profits.

Thus, they developed a tactic to avoid paying: They deposit the would-be profits in the bank as security against a credit line. In this way, they haven't been paying any corporate tax for the past eight years. So the choice is between giving them a discount and getting some tax out of them, or not giving them a discount and getting nothing. The choice, in other words, is whether to be right or to be smart.

Given the size of the budget shortfall, it looks like we need to hold our nose, push back our nausea and just do it. Not happily, not with our blessing, but for lack of choice - because otherwise we'll have to raise taxes on the middle class by another NIS 3 billion.

Social justice

One of the social protest's accomplishments was subsidized daycare until 4 P.M. for children ages three to nine whose parents work, in order to ease the burden somewhat for the secular middle class.

But now it's turning out that these daycare centers will be serving primarily the ultra-Orthodox, most of whom don't exactly work. Education Minister Gideon Sa'ar is responsible for this. He called for canceling the requirement that the parents work, and the cabinet went along with this. As a result, during the upcoming school year most of the beneficiaries will be ultra-Orthodox.

This includes Haredim living in Safed, Netivot, Bnei Brak, Beit Shemesh, Kiryat Arba, Elad, Emanuel, Hebron, Beitar Ilit and Modi'in Ilit. The majority of them don't work, but they'll be getting heavily subsidized daycare - at the expense of the middle class's taxes. This is the new social justice, brought to you by Beit Midrash Sa'ar.