Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid are still at loggerheads over a plan to raise the corporate tax rate on January 1. Netanyahu wants to scrap the plan, which would raise the tax from 25% to 26.5%, up, while Lapid is resisting.
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Netanyahu is used to having his way at the Finance Ministry. Lapid’s predecessor, Strategic and Intelligence Affairs Minister Yuval Steinitz, is a close associate of Netanyahu.
A month ago, Lapid canceled a planned increase to income tax rates that would have gone into effect on January 1, without discussing it with Netanyahu. He left the corporate tax hike in place.
Canceling the corporate tax increase would cost the state 1 billion shekels, which is a relatively small sum in budgetary terms. Sources expect Netanyahu to succeed in doing away with that tax increase sometime in 2014.
Such a move is also unlikely to raise opposition from Lapid’s voters.
Netanyahu had previously called for cutting corporate taxes to 18% by 2016, in the belief it can encourage growth.
Meanwhile, the cabinet approved in its weekly cabinet meeting Sunday a proposal by Netanyahu and Lapid to reduce a planned hike in employers’ contributions to the National Insurance Institute. It calls for increasing, from 6.5% to 6.75%, the maximum percentage of an employee’s salary that employers are obligated to pay into the state social insurance system, from January 1. An earlier proposal would have raised the ceiling to 7%.
The cabinet also approved a Finance Ministry proposal to tighten spending limits on the government’s budget starting in 2015. As a result, government spending in 2015 will rise by only 2.6% instead of the original target of 4%.
“The meaning of this measure is the prevention of a dramatic increase in taxes and the prevention of a swelling of government expenditure beyond what is needed,” Lapid said in a statement.
The new expenditure rule will be determined by a formula based on population growth in the three years prior to the budget as well as the desired level of debt to gross domestic product – 50% – divided by the actual debt-to-GDP ratio.
Debt to GDP is currently at 68%.
The Finance Ministry has forecast a budget deficit of 3% of GDP in 2013 and 2014. The 2013 budget deficit is expected to be well below a 4.3% target due to higher than expected tax income and lower than expected spending.
Following the cancellation of the income tax hikes, the Bank of Israel expressed doubt on the government’s ability to meet a 2015 budget deficit target of 2.5% of GDP. The bank said extreme policy measures – raising taxes or cutting spending – would be needed.
On Sunday the central bank said it supported slowing the rate of growth of public expenditure, “in view of the assessment that the growth potential of the economy in the next few years, against the background of demographic changes, is expected to be lower than it was in the past decade,” the bank said in a statement.
But it said an adjustment in the budget should also come from increasing tax revenues, since public spending in Israel is already not high while the tax burden is low, compared with other advanced countries.
More money for settlements
Meanwhile, the Knesset Finance Committee approved a 66-million-shekel budget increase for the local authorities in the West Bank settlements, following a stormy discussion – 38 million shekels for young communities, 27 million shekels for security and 1 million shekels in grants from the interior minister.
MKs demanded to know why they had been called for an urgent meeting on a day when the committee generally does not meet, while MK Stav Shaffir asked the Finance Ministry representatives why this decision was so urgent that it had not been presented to committee members a week in advance, a policy set two months ago.
Last week, Shaffir appealed to the High Court of Justice against the way budgetary changes are pushed through the Finance Committee.
Asked which places would receive the money for “young communities,” the Finance Ministry representatives said, “We have no idea.”