A social protest movement has emerged over the rising cost of living
Israeli protesters flash "V" signs for victory as they protest in Tel Aviv on July 14 for the anniversary of last summer's social justice demonstrations to protest the spiralling cost of living. Prime Minister Benjamin Netanyahu, who has long boasted how Israel has avoided the fiscal fate of Spain and Greece, is poised to unveil tough austerity measures likely to hit the underprivileged. © David Buimovitch - AFP/File
A social protest movement has emerged over the rising cost of living
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Jean-Luc Renaudie, AFP
Last updated: July 27, 2012

Israel eyes austerity after prosperous year

Prime Minister Benjamin Netanyahu, who has long boasted how Israel has avoided the fiscal fate of Spain and Greece, is poised to unveil tough austerity measures likely to hit the underprivileged.

The measures will aim to make up part of the budget deficit that has climbed to 4.0 percent of Israel's GDP -- twice that which was expected for 2012.

Taxes on cigarettes and beer have already been hiked this week, and according to media reports the government will also be raising VAT from 16 to 17 percent and introducing a 2.0 percent income tax rise in households with an annual income of at least a million shekels ($245,000, 199,300 euros).

Also expected is a combined 700-million-shekel ($171 million, 140 million euro) cut from the budgets of all ministries with the exception of defence, education and welfare.

A spokesman for Netanyahu told public radio on Thursday that the projected measures would raise the annual tax burden of each Israeli household by 1,740 shekels ($426/347 euros).

But these could only be the beginning, with Finance Minister Yuval Steinitz preparing an additional series of tax rises for 2013.

"There are no free lunches," Netanyahu said this week in an attempt to justify the austerity plan.

The government, he said, had to increase its income to fund free childcare from the age of three, to build a security fence along its southern border with Egypt to stop illegal immigrants, and to acquire "new weapons and defence systems to cope with new threats."

And earlier this week, he also suggested the defence budget could rise even further because of regional developments, notably in Syria.

Beyond the increased expenditure, tax revenues have dropped because of slow economic growth, which is 3.1 percent so far this year compared with 4.8 percent in 2011.

"Those who say that we can spend lavishly... endanger the state of Israel and could easily lead it to the brink of bankruptcy, as is the case of leading European economies," Netanyahu said.

Israeli officials also fear that the major international rating agencies, which had hitherto provided Israel with a clean bill of health, will lower their ratings.

Until now, the Jewish state had effectively escaped the sub prime crisis of 2008 and the beginning of the current crisis in the eurozone.

"To ensure stability, we must take unpopular measures," said Harel Locker, director general of Netanyahu's office.

The bitter pill the government is about to prescribe has been harshly criticised as unjust by the opposition, by the Histadrut trade union confederation and by leaders of the social protest movement which emerged in summer 2011 over the rising cost of living.

And even within the coalition, several religious and ultra-nationalist parties denounced the "anti-social" character of Netanyahu's plan for 2013, an election year.

It is the planned increase in Value Added Tax (VAT), which will affect all Israelis, that has come in for the harshest criticism.

Oded Shahar, an economic commentator for Israeli public television, called it "daylight robbery."

And Sever Plocker of the top-selling daily Yediot Aharonot said the hike was not the fault of "the European crisis" but was because of "the blindness" of the Israeli government.

One of the main critiques levelled at Netanyahu is his intention to give a huge "gift" to multinationals by halving the taxes on monies earned in Israel and which are transferred abroad, from 25 percent to 12 percent.

The Treasury justified the move, saying it would encourage the firms to repatriate their profits rather than having them "sleep" in Israeli banks -- which brings nothing to the taxman.

In a defensive statement on Thursday, Netanyahu said that "even after the steps we will take, families in Israel -- middle-class and underprivileged -- will remain with more money in their pockets" thanks to measures such as free education from the age of three, tax benefits for working families and free dental care for children.

And central bank chief Stanley Fischer was quoted as saying that Netanyahu's planned measures were "very serious progress" which displayed "very responsible leadership by the economic decision-makers."

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