Dei'ah veDibur - Information & Insight

A Window into the Chareidi World

3 Cheshvan 5764 - October 29, 2003 | Mordecai Plaut, director Published Weekly









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Shema Yisrael Torah Network











Treasury Wants to Raise the Income of Low Earners
by M Plaut

Senior officials in the Treasury said that they plan to raise the income of those with low earnings -- up to NIS 10,000 ($2,225) a month -- by NIS 100-150 a month. The way this will be done and how it will be financed are still under discussion.

Analysts say that the Treasury was shocked by September's negative CPI (Consumer Price Index), indicating that the recession is deeper than suspected. In response they feel it is necessary to get more money into the hands of low wage earners who will spend it and stimulate the economy. According to press reports, they plan to put as much as NIS 2 billion into the economy this way.

The first rumors are that the treasury plans to raise taxes on diesel and cigarettes and to revoke Eilat's VAT exemption. The treasury also is talking about bringing back the anachronistic stamp tax on contracts.

The diesel tax will be gradually raised to the same level of tax imposed on 95 octane gasoline, which would raise its price to about NIS 4 per liter. Purchase tax on cigarettes would rise by about one shekel per pack. Prime Minister Ariel Sharon has always objected to revoking Eilat's VAT exemption, and he may veto it this time as well.

All of these moves are expected to yield NIS 2.4 billion. Of this, NIS 500 million will be used to subsidize public transportation to enable it to maintain current prices despite the rise in the price of diesel fuel.

The treasury intends to announce the tax hikes in the next few days as part of the 2004 state budget. It will argue that the new taxes do not increase the overall tax burden on the public, since hikes are balanced by cuts.

As far as distributing the money, one proposal is a net wage increase of up to NIS 150 for average income earners whose monthly gross is NIS 7,000. Another proposal is to give all workers who earn up to NIS 10,000 an increase of NIS 100. The means may be a reduction in the NII payments or in income tax rates. Those who do not earn enough to pay tax will receive a special allowance.

In line with the Treasury's approach, only those who work will receive the increase. No increases are proposed for transfer payments such as child allowances and pensions. Finance Ministry sources said the full plan will take two to three weeks to formulate before being presented to the cabinet.

Interest Rates Reduced

On Monday the Bank of Israel (BOI) today announced its monetary program for November 2003, according to which the interest rate will be reduced by 0.5 points to 5.6 percent. This brings the cumulative reduction in the Bank of Israel's interest rate since December 2002 to 3.5 percentage points.

The reduction had been widely anticipated in view of the negative inflation reported in September. Analysts said that rates are still high and there is room to cut more. The BOI said that its policy at all times is aimed at attaining price stability over a period of one and two years but that its models indicate that it is possible to attain the inflation targets for the coming years while continuing to reduce the interest rate. Further cuts are expected this year.

Many factors, including the government, have been pressuring the BOI to lower interest rates in order to stimulate growth. The BOI argues that the reduction of the short-term interest rate per se cannot bring about the renewal of growth. A precondition is the maintenance of fiscal discipline, and indeed, the government's budget for 2004 submitted to the Knesset indicates the start of convergence to a downward trend for the deficit and government debt, following their three-year upward trend. This, together with the reform in the labor market and the reduction in the number of foreign workers, the implementation of the plans for infrastructure investment and other steps with long-term implications related to curbing public expenditure may be expected to help buttress stability and steer the economy back to a path of growth.

The BOI points out that the spread between central bank interest rates is now below 5 percent, and the yield spread between long term bonds is less than 4 percent. This is much lower than recent spreads which approached 9 percent, but many argue that it is still too high.

Rise in Poverty

The number of Israeli families living below the poverty line increased from about 100,000 to 300,000 between 1988 and 2001, according to a Bank of Israel survey published Tuesday. The National Insurance Institute (NII) defines the poverty line as half the median income.

The study claimed that increasing transfer payments of the NII is not effective in reducing poverty. Special attention was given in the study to the NII payments, which increased sharply in the period of the study, and to the characteristics of special subsegments of the population, including chareidi, non-chareidi and non-Jewish.


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