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.
