Netanyahu Vows: Israel's Middle Class Won't Be Hurt by New Budget Plan

Netanyahu seeks to ease concerns a day after Steinitz announced government was raising taxes on cigarettes and other tobacco products.

Prime Minister Benjamin Netanyahu promised yesterday that the tax hikes and spending cuts in the state budgets for this year and next will not come at the expense of the average Israeli.

"Even after the steps we take on Monday, families in Israel, the middle class, the weaker populations will still have more money in their pockets," the prime minister said at the end of a meeting with Finance Minister Yuval Steinitz and Bank of Israel Governor Stanley Fischer to discuss the 2012 and 2013 budgets.

Netanyahu sought to ease concerns a day after Steinitz announced the government was raising taxes on cigarettes and other tobacco products. On Monday, the cabinet is also expected to approve an increase in taxes amounting to NIS 9 billion this year and next at its weekly meeting, without waiting for the 2013 budget. In addition, the Israel Tax Authority and Justice Ministry are preparing new legislation to crack down on tax cheating.

Netanyahu said on Wednesday that decisions on budget cutbacks in 2012 would not affect funding for education and social services. Yesterday, he went further by insisting that ordinary people would still be better off despite the spending cuts and tax hikes.

Referring to a new law to provide free schooling from age 3, Netanyahu said, "Hundreds of thousands of families will save NIS 800 a month. We have created tax credits for working families worth hundreds of shekels a month that went into effect in January 2012. We've initiated serious reductions in monthly cell-phone bills and have free dental care for children under age 12.

"This is a major change that in the end has left most of Israel's citizens with more money in their pocket," he said.

Deep dilemma

Netanyahu faces a deep dilemma as slowing economic growth has cut into tax collections at a time when the government has made a host of new spending commitments, such as free preschool education.

On the one hand, Netanyahu is concerned about public opinion. Elections are likely to be called in the first half of next year as fiscal austerity measures are taking their toll. On the other hand, he cannot afford to allow deficit spending to grow to more than 3% of gross domestic product without upsetting financial markets, which are alert to fiscal imbalances more than ever because of Europe's troubles. He also jeopardizes economic growth and risks sparking inflation with overspending.

Netanyahu also faces resistance from the cabinet. Yesterday, Deputy Health Minister Yaakov Litzman criticized plans to cut NIS 35 million from his budget as part of across-the-board cuts in ministry spending. He said it would delay plans to renovate psychiatric hospitals and to enhance security against rocket attacks at Ashkelon's Barzilai Medical Center.

Industry, Trade and Labor Minster Shalom Simhon said cuts at his ministry would eliminate subsidies for 5,000 children in day-care centers that enable their mothers to work. Some 600 vocational students would also not get assistance from the ministry, he added.

"When they say they won't hurt the Education Ministry's budget, they also can't cut the educational spending included in the Industry Ministry budget," Simhon said.

At yesterday's news conference, Steinitz emphasized the government's success in creating new jobs by spurring economic growth over the past three years since it took office.

"Instead of creating just 160,000 new workplaces, the economy grew and 330,000 workplaces were created - double the norm," he said.

"In order to maintain and preserve the economy ... we have set a realistic deficit target," Steinitz said, referring to the cabinet's decision to double the deficit target to 3%.

"We need to make every effort and take every measure to meet this goal, including unpopular decisions, and that is what we are doing here, now, next week, in order to broadcast to the entire world that we are serious," he added.

'Leading the public astray'

Fischer, who came out publicly against the government's decision to widen the deficit by so much, said, "Over recent months I have been a little critical of the government's fiscal policies," he said. "But what I have seen in the last two days is very serious progress, very responsible behavior by economic decision makers. I hope that within a few days we will see a package that really changes the Israeli economic situation and enables it to continue growing at a very respectable rate."

Shelly Yacimovich, the chairwoman of the opposition Labor Party, accused Netanyahu of misleading the public into thinking it will benefit from tax hikes and budget cuts.

"There is a limit to the myths they can tell the public," she said, "when Netanyahu says the middle class and the poor will have more money after all the [economic] decrees and knowingly leads the public astray. Raising value-added tax will make the life of everyone in Israel infinitely more costly."

Ora Coren and Ronny Linder-Ganz contributed to this report.

Stanley Fischer, left, Yuval Steinitz and Benjamin Netanyahu at news conference yesterday.
Olivier Fitoussi