Finance Minister Yair Lapid – Photo: Gideon Markowitz

The bill cuts 25 billion shekels ($7 billion) from government spending in 2013-2014: 7 billion shekels ($2 billion) this year and 18 billion shekels ($5 billion) in 2014.

Some 4 billion shekels ($1 billion) will be cut from defense spending and 2 billion shekels ($560 million) from education and transportation over the two years. Additional cuts, yet to be determined, will be made from the welfare and health budgets.

As part of Lapid’s deal with Histadrut labor federation Chairman Ofer Eini, negotiated to avoid a general strike that could potentially shut the Israeli economy down, a 2 billion shekel cut and wage freeze planned for the public sector will be revised. Finance Ministry and Histadrut officials are still negotiating the final agreement, which Lapid and Eini are expected to sign next week.

One of the biggest bones of contention in the proposed budget bill is the Finance Ministry’s plan for a 3 billion ($841 million) cut in child allowances and day care subsidies. The bill proposes cutting child benefits from 175 shekels ($50) to 140 shekels ($39) per month per child.

Knesset members from all factions are expected to oppose the child allowance cut vigorously. However, the Finance Ministry has already prepared two compromises to help win it a favorable vote: If the proposed child allowance cut meets what ministry sources define as “mere opposition,” the benefit will be cut to 150 shekels ($42) instead of 140 shekels. And if the cut meets fierce opposition that might jeopardize the entire budget bill, the child benefit will be set at 160 shekels ($45) per month.

“Every minister has already declared their ministry a disaster zone, which is fine,” Lapid said on Monday, adding he was ready to “deal with whatever pressure is exerted on me.”

‘Series of new taxes unprecedented’

The budget bill also calls for an unprecedented series of new taxes, which the Finance Ministry believes will yield the state some 20 billion shekels ($562 million) in revenue over the next 18 months.

Value added tax will increase from 17 to 18 percent as early as June, which will automatically drive up public transportation prices, as well as the prices of most goods and services.

Despite raging opposition, the ministry also plans to cancel various value added tax exemptions afforded to the tourism industry, although it has yet to announce its final decision about revoking the VAT exemptions given to the southern resort city of Eilat, whose economy is almost completely dependent on tourism.

The Finance Ministry also plans to raise income taxes by 1.5% from January 2014 for those earning more than 5,000 shekels ($1,400) a month, a move that is expected to cost the average Israeli family an extra 3,000 shekels ($840) a year.

The ministry also plans a 0.5% rise in the health tax for high income earners.

Other taxes include revoking the health tax exemption afforded to housewives; imposing a 20% tax on alcoholic beverages and higher taxes on cigarettes; introducing a new, 25% land betterment tax for individuals who own more than one apartment; and imposing a 35% tax on pension plans for those earning over 15,000 shekels ($4,200) a month.

Lapid also decided to increase corporate income tax by 1% to 26%, as well as impose a uniform 15% tax bracket for all major corporations. However, companies that operate outside central Israel will be excluded and will remain in their current, 10% tax bracket.

An Israel Tax Authority report released on Monday said that the scaled corporate tax employed by the Finance Ministry in previous years, in an effort to encourage capital investment in the private sector, resulted in a staggering 70% tax break for the four largest corporations in Israel between 2003 and 2010.

The four companies, which were not named in the report, paid only 3.3% in taxes, effectively receiving a 5.6 billion shekel ($1.56 billion) tax break in 2010 alone. According to the report, the state will lose nearly 10 billion shekels ($2.78 billion) in 2013 in a similar scheme.

“This is outrageous, but it’s a law that was passed by the Knesset and must be upheld. We will initiate a dialogue with the major corporations and we’ll see what can be done to change the rules of the game,” Lapid said.

“This is a ‘no-choice’ budget, but I believe the public will understand what needs to be done [and will accept the changes] as long as [they] see that we’re treating their money with respect.”

‘Time to change the system’

Speaking at a Calcalist financial conference on Monday, Lapid said, “The middle class is not upset because it has to pay taxes to support those who are less privileged. They are upset because they feel, and justifiably so, that for many years their hard-earned money has been snubbed; that instead of helping the weak, those taxes funded certain sectors, irresponsible tycoons and unnecessary government ministries. It’s our job to change that and create a just system.

“During the election, I kept asking, ‘Where is the money?’ That was a rhetorical question, of course, since we know where it money went — it went to all the wrong places for all the wrong reasons. Today, we’re cutting things no one else dared touch, so now the question is, ‘What will we do with the money?’ We plan to invest it in the working public. It’s their money and they should get it back.”

Lapid also criticized “the tycoons, big unions and certain sectors that are willing to do anything it takes not to be taken for fools … but have no problem making a fool of the middle class. We will fight monopolies, aggressive debt reconstruction schemes and excessive concentration of wealth in the economy, because these are bad for the working public.”

Lapid stressed Tuesday that the austerity measures were short-term, saying, “This is what leadership and taking responsibility are all about. We knew this was going to be hard and we know people are angry, but we can’t be blindsided by anger when the other option spells the economy’s collapse. “

He said that for the first time in years, “we’re making sure that the middle class is not the only one paying the price — this will affect sectors which until now were politically immune.”

“If we were to do nothing then the hole in the deficit would just grow bigger and social services would collapse,” he said. “Every time you see TV reports about a country about to go bankrupt, you should know that it was brought about by spendthrift politicians who buckled under pressure. That is not going to happen on my watch. In two years, things are going to be completely different.”

View original Israel Hayom publication at: http://www.israelhayom.com/site/newsletter_article.php?id=9115