Don't Lower Taxes Just Yet, Lapid

Government may be awash with cash thanks to a budget surplus, but that doesn't mean tax rates should be reduced immediately. There are bigger priorities...

Finance Minister Yair Lapid’s response to last week’s news of the significant budget surplus was a pleasant surprise. Despite heavy pressure from journalists to tell them that he was immediately cutting taxes and increasing the budgets for education, health and welfare, he said he would have to evaluate matters and not rush to boost spending. He even said that deficit reduction was also important, not just reducing taxes.

Too bad he added that he hated the budget he’d submitted. What’s to hate? That he had to reduce spending and impose cuts, while he wanted to be Santa Claus and give out presents? Lapid should actually be rather proud of the cuts he passed, because they prevented a serious crisis. He needs to understand that a good finance minister is not one that gives out goodies to the masses so that they’ll love him.

If he has anything to be sorry about, it’s that he missed the opportunity to push through some important reforms that would have reduced the cost of living, and increased growth and unemployment. That’s what he should hate. He should also fix it.

All those pushing him today to increase outlays because of the budget surplus are bad advisers who seek his downfall. This year, 2013, is basically over, and the only thing that must be done with accumulated surpluses is to reduce the deficit of GDP (gross domestic product), so that instead of finishing the year with a frightening deficit of 4.65 percent, we’ll end it with a deficit of 3.5 percent, which is plenty high.

All that’s relevant now is the budget for 2014. By law, on December 10 the treasury’s budget division must submit an updated report on income and expenses for 2014 to the Knesset Finance Committee. Despite the slight drop in growth, as reported this week by the Central Bureau of Statistics, tax revenues next year are expected to be higher than earlier estimates, which should allow for tax rates to be reduced.

That is a correct and necessary step, since the tax burden here is too high and one of the reasons for the drop in growth and hike in the cost of living. Reducing taxes would be an injection of jet fuel into the engines of growth.

Income tax should be reduced – both the marginal tax, which has crossed the 50 percent line, and the tax rates levied on the middle class. Value-added tax, corporate tax and customs duties on industrial goods and food should also be lowered.

In short, what needs to be done is just the opposite of what’s being recommended by recently installed Bank of Israel Governor Karnit Flug. She believes in high taxes and increasing government spending. But that’s bad for growth, bad for employment and doesn’t do anything to improve public services - it just makes them fatter, more bureaucratic and wasteful.

As an example, take the recent additional budgets given to the Israel Defense Forces, or the grandiose renovation work about to begin on the Bank of Israel building. If Flug had ever worked in the private sector, she would discover that it’s possible to cut and streamline while improving service and raising output.

In any case, no surpluses should be left in the 2014 budget. Any extra money should be returned to the people in the form of lower taxes - because the minute there are surpluses, the strongest pressure groups are the ones that pounce and get them (again, look what happened recently with the defense budget). A better decision, both economically and democratically, would be to transfer the surpluses back to the people, because it’s always preferable that the marginal shekel remains in the public’s hands and not in the hands of the government. The benefit to residents will be greater.

There is another important advantage to reducing taxes and not increasing spending. This will allow Lapid and Prime Minister Benjamin Netanyahu to fix the huge mistake that was dubbed “the new fiscal rule” for calculating the government spending ceiling, which greatly expanded government spending and was the main cause of the 2012 budget crisis.

Now we need to establish the “correct fiscal rule,” which will limit the annual increases in government spending to 2 percent. That way, Lapid can fulfill his campaign promise and continue to lower taxes in the coming years.

Ofer Vaknin