PM to Haaretz: Political Turmoil Forced Steps

Commodity prices are rising around the globe, contributing to some of the price increases that have sparked public protest and led to Netanyahu's announcement.

Prime Minister Benjamin Netanyahu's announcement of a range of steps ostensibly intended to ease the financial burden of the lower and middle classes raised lots of questions yesterday.

The questions concerned the steps themselves, which include raising the minimum wage, canceling the increase to the gasoline excise tax, reducing municipal water rates for most households and making public transportation cheaper. They also concerned the process by which the decision was reached, which imply that political pressure and the threat of a general strike are sufficient to force a change in government policy.

Meanwhile, commodity prices are rising around the globe, contributing to some of the price increases that have sparked public protest and led to Netanyahu's announcement.

Netanyahu spoke to Haaretz/TheMarker last night in an effort to clear up some of the questions.

"The volatility in global markets will increase the political volatility, and it's clear that this is going to create turmoil," he said. "The question is whether we keep the [budget] framework and don't ignore real crises. The answer is that we need to do the right thing," he said.

The decision to cancel the gasoline excise tax hike, which went into effect on January 1, shows the government didn't do the right thing.

"The current situation created a failure on the psychological level, which is an important aspect of the economy," he said. When gas prices increased, "the public didn't differentiate between the tax increase and the portion that was due to increasing global oil prices. The public believed that the full price increase was due to a government decision, and that's not the case."

The steps announced yesterday are being funded by a government-wide cut. Economists have termed this "foolish," because it does not differentiate between priorities and budgetary line items. The blind cut will affect government services as a whole, including education and welfare.

Netanyahu says the government had no choice in the matter. "The cut will not affect certain things, but we had no choice. You can't make something out of nothing. This was the option we were left with, because we had to make a decision. The government-wide cut is relatively small - between 1.5% and 2.5% - and I believe it will ultimately come out to 1.8%."

The government will also fund the steps announced yesterday, by postponing planned cuts to corporate and income tax. Netanyahu had been particularly proud of the multi-year plan to cut these taxes, and many had said that this was a national growth engine. Now it seems the government could cancel the final cuts planned for corporate tax, meaning that the reform will have stalled.

"We need to make sure that the intent to cut taxes isn't harmed," Netanyahu said. "If we need to consider canceling or delaying the corporate tax cut, we'll check what the companies' profit margins are and decide what's left. I doubt that this will happen. We might need to spread out the tax brackets. One thing is certain - we'll do what we need and we won't deceive."

While the steps announced yesterday appear meaningful, they include one potential land mine - raising the "real" minimum wage. This refers to the fact that there are thousands of public servants who officially receive minimum wage but in practice receive much more, due to various benefits (see article below ). Histadrut labor federation chairman Ofer Eini may demand that these individuals be included in the wage increase, which could make the reform significantly more expensive. The plan released last night did not include a solution for this issue.

Netanyahu says that while the national trade union organization is demanding that these employees' salaries be raised, the reform should affect only those who earn minimum wage in practice.

"Our demand is that minimum wage be raised for the have-nots, and not for the haves. If we give to the haves, there will be less for the have-nots," Netanyahu said.