The Exact Opposite of What We Need

The sharp drop in tax revenues, coupled with fear about the build-up of a dangerous deficit in the budget, prompted Finance Minister Silvan Shalom to start to formulate an emergency economic plan.

The sharp drop in tax revenues, coupled with fear about the build-up of a dangerous deficit in the budget, prompted Finance Minister Silvan Shalom to start to formulate an emergency economic plan. But the truth is that when Shalom presented the 2002 budget to the Knesset, it was already clear that it was an unrealistic one that did not suit the state of the economy and that an additional large cut would be unavoidable.

Already then it had been written here a few times that growth in 2002 would not reach 2 percent and, therefore, tax revenues would be some NIS 8 billion down on the figure cited in the budget book. At the time, the director of the Customs and VAT Department also announced that customs revenues in 2002 would be some NIS 2-3 billion less than planned for. To this, one must add the tax breaks afforded to real estate owners and contractors (a cost of around NIS 700 million), plus a few hundred million more granted to the disabled.

The extraordinary fact that the budget reserve had been utilized even before the onset of the tax year also made it clear that the budget was a bluff.

Putting the numbers together revealed then that the deficit in 2002 would not be 3 percent (or some NIS 15 billion), but 5-6 percent (around NIS 25 billion) instead. Hence, a cut of NIS 10 billion was a necessity born out of the reality already at the beginning of the year, prior to Operation Defensive Shield.

The current urgency and the dramatic "emergency meeting" with the prime minister are nothing more, therefore, than a tactical exploitation of the state of war, stemming from the hope that this difficult situation, with the ministers and lawmakers deliberating over human lives, will make it easier to implement a deep cut in the budget.

During the meeting Tuesday, Ariel Sharon said: "First of all, the army must get a budget increase, and then a budget source for this has to be found." The director-general of the Finance Ministry, Ohad Marani, noted that that was exactly how the hyper-inflation of the early 1980s had kicked off, and hence there was a need to find a distinct additional budget source - in other words, cuts or taxes.

Politicians always prefer taxes, but the more difficult solution is also the more correct one - cuts in the budgets of the government ministries and the transfer payments of the National Insurance Institute, without increasing the tax burden. All economists know that increasing the tax burden during a recession is a sure-fire way of further slowing down economic activity - in other words, the exact opposite of what we need right now.

Raising taxes is a particularly poor course of action when it is based on revenues from labor. Nevertheless, the treasury plans to increase income tax or impose a war loan. Such a loan encompasses all the evils of imposing a tax, together with the bureaucratic mechanisms that will be set up to repay the loan to the public when the time comes. And, primarily: A loan does not lower the deficit, because the money has to be repaid. During internal debates at the treasury, Shalom expressed support for imposing such a loan, believing that such a move would be readily accepted by the public and would not derogate from the popularity of the finance minister.

Before imposing an additional burden on the middle class, on those who work and pay taxes as required by law and also perform reserve military duty, it would be worthwhile annuling all the private-member legislation. In such a manner - with the revocation of the Large Families Law, the Negev Law and the law that affords tax breaks to settlements in the territories - the budget will receive a NIS 2 billion injection. In addition, there is a need to close up the numerous loopholes in the income tax laws that allow the wealthy to earn revenues abroad without paying taxes on them.

It would also be a good idea to ask the finance minister why now was the right time to lower taxes on real estate. Why was it necessary to improve the lot of the landowners and contractors by lowering betterment tax, doing away with sales tax and recognizing, for tax purposes, the financing costs involved in purchasing real estate? After all, in such a manner, the real estate sharks will be awarded a few hundred million shekels from the state coffers - a sum that is sorely lacking at this point in time.

And the most infuriating thing is the announcement that to counter the lowering of these taxes, the finance minister will increase the tax that is imposed on the workers - a distinctly anti-economic and anti-social move.