Bank of Israel Governor Stanley Fischer on Wednesday declared his support for raising Israel's Value Added Tax (VAT). Raising taxes – specifically VAT – by at least 1% is the only way to close the budget gap, which has grown substantially in the last two years as the government “gives away” benefits to union workers and cuts import duties and fees on certain products.
“We have many challenges, and during these times the fiscal policy we need to undertake is complicated,” Fischer said at an international gathering of port officials in Jerusalem Wednesday night. “We must raise taxes, even if that is a difficult thing to do at this time. I hope we will be able to ensure the continued growth and stability of the economy. We have succeeded in doing this until now, and I hope we will be able to continue.”
Fischer criticized the local media for its reporting on the economy, which, as far as he is concerned, is doing well. “When you read the newspapers in Israel you get the impression that everything here is topsy-turvy. I suggest we we look at the numbers and statistics. Our deficit is under control. We managed to ensure fiscal discipline even during the economic crisis. And we have had great results over the last decade: Our GDP is comparable to Greece's and Spain's, although we are nowhere near the levels of Germany or the United States.” The current crisis in Europe has slowed Israel's economy somewhat, by limiting exports, said Fischer, but Israel's growth rate is still good, he added.
Among the issues in the upcoming state budget is an increase in defense spending. The government has proposed a number of ideas to generate the money to pay for that increase, such as asking all ministries other than Defense to reduce their outlays by up to 10%. Most ministries balked, claiming that they had their own needs, and apparently, analysts said, Fischer has decided that the most efficient way to raise the money is by increasing VAT by 1%. While the increase may somewhat dampen financial activity, the analysts said, Fischer believes that the impact will be minimal, and the Israel's growth and financial stability can be maintained.