JERUSALEM | Mon Jul 30, 2012 8:34am EDT(Reuters) – Israel’s cabinet is expected to approve a controversial package of tax hikes and spending cuts aimed at reining in the budget deficit, which analysts say will give the central bank room to resume monetary easing to support a weakening economy.
The vote is slated for later on Monday although such discussions in the past have gone on into the night. Prime Minister Benjamin Netanyahu has received the backing of one of his coalition partners, Yisrael Beiteinu, but ministers from the ultra-Orthodox Shas party are likely to vote against the plan.
Israel’s economy weathered the global economic crisis well until a year ago when exports began to slow as a result of a downturn in Europe and the United States – Israel’s two largest trading partners. Exports account for about 40 percent of Israel’s economic activity.
Israel forecasts economic growth of around 2.5 percent this year, slowing from 4.8 percent in 2011 and resulting in a tax revenue shortfall that will push the budget deficit closer to 4 percent of gross domestic product (GDP). That would be well above an initial target of 2 percent.
The government last month opted to raise the 2013 deficit target to 3 percent of GDP from 1.5 percent, leading Bank of Israel chief Stanley Fischer to warn that interest rates may have to rise since fiscal loosening is inflationary.
The measures the cabinet will vote on include raising income taxes by 1 percent on those earning more than the average salary of 8,881 shekels ($2,198) a month starting in 2013. Taxes on salaries over 67,000 shekels a month will go up 2 percent. Income tax rates in Israel range between 10 and 48 percent.
Value added tax (VAT) is also set to rise to 17 percent from 16 percent, most ministries’ budgets will be trimmed by 5 percent and the tax authority is targeting tax evaders to collect billions of shekels. Last week, Finance Minister Yuval Steinitz ordered immediate tax hikes on cigarettes and beer.
The Finance Ministry said the measures would add 14.4 billion shekels to state coffers next year…Read More>>