THE JEWISH WORLD
THE ECONOMY
More cuts in the national budget, tax reforms, higher interest rates
The stewards of Israel's economy, in coordination with Prime Minister Sharon, have decided on a number of steps to overcome the country's severe economic crisis, including more cuts to the national budget and extensive tax reforms. In an attempt to bring the rising dollar under control, the governor of the Bank of Israel raised the prime interest rate for the second time in one month, and upped the VAT by one percent, to 18%, as of June 15, 2002.
Budget cuts
The government will cut another NIS 2 million from the state budget for 2002, on top of the NIS 13 million cut approved earlier this year under the emergency economic plan. The government will also will put forward legislation to block private members bills that grant benefits to various population sectors. The National Insurance Institute allotments will also be cut. "We have a strong economy with problems," said Prime Minister Ariel Sharon, "but we have the ability to overcome this situation and restore the economy to a growth pattern." Minister of Finance, Silvan Shalom, maintains that the economic crisis was caused by the security situation, which necessitated an enormous increase in defense expenditures. As a result of the decision to make cuts to the national budget, the Governor of the Bank of Israel, David Klein, is not expected to raise the prime interest rate at the end of the month.
Tax reforms
The Public Committee for Tax Reform, headed by accountant Itamar Rabinovitch, submitted its recommendations this week. The major beneficiaries of the program, which is expected to extend over a five-year period, will be the middle class, who will receive a 10% break in taxes. Nonetheless, taxes are likely to rise at first, due to new capital gains taxes. Following are the main reforms:
For the first time, capital will be fully taxed: stocks, shekel bonds, savings plans, and deposits.
A 10% (nominal interest) and 15% (real interest) on interest and capital gains.
A 25% capital gains on profits from non-negotiable assets and dividends.
Taxes on income earned by Israelis abroad.
A 15% tax on savings cashed in prior to retirement age.
Pensioners earning wages of more than NIS 4,000 a month will be obligated to pay full taxes on the interest from their earnings.
A 25% tax on profits from the liquidation of companies
The financing of the reform is based on the assumption that, beginning in the year 2004 the Israeli economy will grow by an average of 4% - and in case growth is lower than anticipated, it will be necessary to make further cuts in the state budget. It is estimated that the proposed legislation on economic reforms will be approved by the Knesset with some changes, such as reducing the tax burden on single people and raising the ceiling on pensioners' tax-exempt income.
Raising the prime interest rate and the index
In an attempt to stem the spiraling rise in the representative rate of the dollar, the Governor of the Bank of Israel decided to raise the prime interest rate by 1.5%, to 7.1%. This was the second time this month that the Bank of Israel raised the prime, which in June rose by 2.5%. As a result of the Governor's announcement, the exchange rate of the dollar dropped slightly, but it recovered the next day, reaching a new high of NIS 4.994. In the days that followed, the dollar dropped slightly. The rise in the dollar during May was responsible for most of the 0.9% rise in the index. The annual rate of inflation is now 8%.
Prime Minister Ariel Sharon who was in Washington last week, defended the rise in interest, saying, "This was a proper and necessary step." While it was initially believed that the Governor would again raise the interest at the end of the month, following the meeting this week between the Prime Minister, the Minister of Finance, and the Governor at which an additional cut in the budget was decided upon, the Governor is not expected to make another hike in the interest rate.
Increased VAT
As of June 15, the VAT increased by 1% to 18%. According to Ministry of Finance forecasts, income from this increase will bring an additional NIS 2.2 billion into the state coffers this year. The new tax rates will be in effect until the end of 2003. Sources at the Customs Authority and in the banks expect that that the increase in the VAT will lead to a 3%-5% rise in the cost of living.
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