As Western leaders appeared to march steadily towards a war
with Iraq that could break out any time, Finance Minister
Netanyahu seized the Israeli bull by the horns with a
sweeping new economic plan that takes something from
everyone.
Because of the abbreviated publication schedule due to Purim,
we were forced to go to press before the final details were
released on Monday evening and had to rely on the advance
notices that were quite extensive, though not
authoritative.
The centerpiece of the new plan is an unprecedented NIS 12
billion budget cut that will affect every segment of the
population. The only ministry to get an increase in its
budget is the Defense Ministry, which will receive a NIS 2
billion increase.
Public transportation, utilities, and pension contributions
will go up while National Insurance Institute allowances
(Bituach Leumi) will go down. Rabbi Moshe Gafni said
that he was stunned that the coalition agreement included
commitments to harm the lower economic strata. He said that
the approach appears to include ideological elements of
opposition to chareidim and is not just pure economics. The
apparent goal is to break the chareidi community
financially.
Under the plan, some 500,000 public sector workers will be
faced with an unprecedented cut in wages, which will be
legislated and not part of a deal with the Histadrut.
Government workers could see up to a 20 percent slash in
salaries, with most cuts averaging 5-8 percent, especially
for wage earners of up to NIS 10,000 per month.
The Treasury will also recommend trimming the state
workforce, laying off some 10,000 workers and placing a
hiring freeze for the next two to four years.
An across-the-board cut of some 2-3 percent in the
operational budgets of ministries is planned.
The economic plan also calls for an increase in the pension
age to 67 from 65 for men and 62 from 60 for women, a move
recommended since 1990 but never implemented. Pension
contributions are set to rise by 2 percent for workers and 1
percent for employers, leaving less money in every worker's
take-home pay. There is also a recommendation that pension
fund assets be invested on the Tel Aviv Stock Exchange
(TASE).
In a move that has already infuriated social organizations,
Netanyahu's plan will include a complete freeze of all
National Insurance Institute allowances, including
adjustments for inflation. Child allowances are set to be
made uniform at NIS 150 ($31) per child, and the birth grant
will be slashed by 50 percent. Currently the allowance for
the first two children is NIS 150 but then it rises to NIS
289 for the third, NIS 586 for the fourth and for the fifth
and onwards it is NIS 724 ($149) per child.
On Sunday Netanyahu met with the former Governor of the Bank
of Israel, Yaakov Frenkel. After the meeting, Frenkel spoke
to journalists. "The strategy which Netanyahu's plan is based
on, as was presented to me today, does not just deal with
budget cuts, but also includes measures allowing for renewed
economic growth," said Frenkel, now chairman of Merrill Lynch
International.
Frenkel, a long-time economic adviser of both Prime Minister
Ariel Sharon and Netanyahu, added, "It's very important to
stop the bleeding occurring in the economy, which is hampered
by a large deficit and debt. If we continue to plan and not
act immediately, the situation will worsen. We simply have no
choice," said Frenkel.
Netanyahu and Minister-without-Portfolio Meir Sheetrit are
the joint architects of the plan. Sheetrit is working inside
the Finance Ministry together with Netanyahu. They formulated
the plan after spending an intense two weeks in meetings and
consultations with business and political leaders. Netanyahu
was also to meet with Histadrut Chairman Amir Peretz.
Netanyahu and his advisers warned that without Prime Minister
Sharon's cooperation, the plan will run into great
opposition, especially as many measures can be expected to
meet with wide protests. So far Sharon has not issued any
public statements in support of Netanyahu's efforts.
Many current tax benefits will be slashed. Residents and
firms in periphery areas, frontline communities, and
settlements will be faced with up to an 80 percent reduction
in current tax benefits, and certain areas may even see a
complete cancellation of current perks.
One element of the program that is expected to increase
disposable income is an acceleration of the tax reform plan
that took effect at the beginning of this year. Income taxes
were supposed to be gradually reduced starting in two years,
on January 1, 2005. Netanyahu proposes beginning the tax cuts
already this July instead, but spreading them out over a
longer period. The initial tax cut to take effect this July
will be smaller than the cut that would have been instituted
in 2005 under the original plan, but it will come much
sooner. At lower incomes, the difference will be slight, but
for someone earning NIS 30,000 a month, the difference will
be almost NIS 500 a month.
Workers earning NIS 15,000 will see a NIS 201 increase in
their take home pay, while those earning NIS 10,000 will have
an extra NIS 138, and pay checks totaling NIS 5,000 will
include an additional NIS 42.
The new program also increases the budget deficit target from
3 percent of GDP to 3.9 percent, giving the government an
additional NIS 5b. of leeway.
