With Elections Looming, Israel's Finance Minister Is Battling Wave of Price Rises

Officials focus on electricity rates as treasury extends customs, purchase tax exemptions on consumer goods

Finance Minister Moshe Kahlon attends the weekly cabinet meeting in Jerusalem November 18, 2018.
\ POOL/ REUTERS

Facing a wave of price rises amid expectations of early elections next year, Finance Minister Moshe Kahlon is scrambling to contain the damage.

Sources told TheMarker that treasury officials were looking for way to delay and moderate a sharp rise in electricity rates, which could reach as much as 8% or even more, in January.

Over the weekend Kahlon announced that he was extending a series of customs and purchase tax exemptions on a host of consumer goods that were due to expire December 31. The move comes as a host of businesses have announced price rises in the last few weeks, most recently a request by bakeries to raise controled bread prices 3.4%.

That followed a joint announcement by Kahlon and Economy Minister Eli Cohen on Thursday naming Prof. Yaron Zelekha, a former treasury official known as a consumer advocate and critic of business, to head a panel exploring policies for bringing down the high cost of living. 

Zelekha’s appointment, however, came under criticism from the Finance Ministry legal adviser due to what he said was Zelekha’s conflicts of interest as an adviser to labor unions.

People wearing yellow vests are protesting price hikes in Tel Aviv, December 12, 2018.
\ Moti Milrod

Kahlon is being confronted with a wave of price hikes both in the business sector and from state-owned monopolies in power and water. They threaten to undo his reputation as a consumer advocate dedicated to bringing down the cost of living through industry deregulation and lower taxes just months before his Kulanu party is likely to face the voters.

On Sunday, sources in the power industry told TheMarker that Finance Ministry director general Shai Babad would be holding an urgent meeting of treasury and Electricity Authority officials to discuss ways of moderating the hike in power rates. 

The increases could cost consumers as much as 2 billion shekels ($530 million) annually, according to Electricity Authority estimates. Independent experts have said the rise will be greater than the authority estimates because it includes a new component that charges users for infrastructure costs for the first time.

Kahlon reportedly wants to spread out the rate rise over several years, out of concern not only for the impact of the hike itself but because it will percolate through the economy and raise prices for other goods and services.

Sources said the authority opposes spreading out the increases, saying it would only delay the inevitable. In any case, electricity rates will have to rise again in 2020 because of the rising price for the natural gas that powers most of Israel’s generating plants, as well as the introduction of higher-cost renewable energy to Israel’s energy mix.

Electricity Authority officials, with backing from energy and finance ministry officials, have proposed instead reducing the fuel that tax power companies pay. Treasury officials said another option was to reopen the contract for natural gas between the gas cartel and state-owned Israel Electricity Corporation in 2019, instead of 2021.

Politicians rarely interfere with decisions by the Electricity Authority, which is answerable to the energy minister but generally acts independently and sets rates based on the expected cost of electricity. 

Meanwhile, Kahlon said the customs and purchase tax exemptions worth about 1.5 billion shekels a year to consumer would be extended another year. 

The exemptions, which were originally unveiled under Kahlon’s “net” programs cover a wide range of good from smartphones and refrigerators to shoes and cosmetics. They normally are taxed at rates ranging from 6% to as much as 30%, although most were in the 12% to 15% range.

Extending the exemptions had been under discussion for a long time in the treasury and Israel Tax Authority inconclusively. Until Kahlon’s announcement over the weekend, importers and retailers were gearing up to raise prices when they expired.

Before the exemptions, smartphones in Israel were among the most expensive in the world because of the 15% purchase tax combined with the 17% value-added tax.