In Israel, Automatically Pushing the VAT Button Isn't Enough

Increasing value added tax, already considered high, is the typical response of Finance Ministry officials, who are responsible for the deficit in the first place.

"This is a budget of hope," Finance Minister Yair Lapid said of the budget cuts the treasury presented for 2013 and 2014. "This is a reform of hope," everybody said about the Open Skies agreement and the beating down of the union at El Al.

Cuts must be carried out, the deficit should be kept as small as possible, and the Open Skies deal will lead to cheaper flights. But do the first economic steps of the Lapid era really offer hope? And if they do, for whom?

In the budget, it's clear the clause promising the biggest take is the VAT increase (NIS 4.4 billion a year), followed by the income-tax increase to be paid by all workers (NIS 2 billion a year), while corporate tax is to be increased by a mere 1 percent, worth NIS 0.7 billion a year. Meanwhile, the promised changes in the investment promotion act, which currently taxes companies ridiculously low, is to be implemented in the distant future at best. These steps hardly represent hope for Mrs. Cohen's family in Hadera, and even less for Mrs. Cohen's cleaner, who lives in a rented apartment.

Increasing VAT, already considered high, is the button traditionally pushed by Finance Ministry officials, who are responsible for the deficit in the first place. This is the most ruthless button of all because it hits the poor first – the people who are forced to use every shekel of their wages (and usually even more, leading them to a vicious debt cycle). The move also hurts the middle class – the people Lapid ostensibly hopes to help. These families are rocked by any extra expense of several hundred shekels.

Money can't be handed out for free, and Lapid is right when he tells MK Meir Porush (United Torah Judaism) that parents are responsible for supporting their children. Still, with Israel's cost of living, many young people, not only the ultra-Orthodox and Arabs but also many of the fully employed who have served in the army and acquired education and a skilled profession, can't promise their children housing, food, education or health services without their parents' help. Why is that? Because being employed in Israel doesn't make you immune to poverty.

All this leads to the Open Skies agreement. A money-losing company and a belligerent union that ignores global changes and defends only certain workers have no right to exist. Still, judging by Israel's experience, privatization and the destruction of organized labor usually benefit the super rich who take over government assets, not the people in general,who sometimes get price reductions but never a significant change in their economic standing. In fact, the public stands a greater chance to lose. The crushing of the unions means a lack of job security and fewer social benefits, which sends more people into poverty.

In the Israeli market's frightening climate, belligerent unions defend only a handful of strong workers, while the vast majority of workers lack job security and earn wages that can hardly cover the ever-growing cost of living. Therefore social stability is on the wane, threatening society and the economy no less than Spanish- or Greek-style government debts – the demonic threat constantly repeated by the Finance Ministry. As long as the state hits the middle and lower classes with regressive taxation without offering compensation, it seems premature to talk about even a shadow of hope.

Olivier Fitoussi