Prices on everything in Israel are about to rise at least 1% - and some things are likely to go up much more – the result of the Finance Ministry's official adoption of an austerity economic plan proposed by Finance Minister Yuval Steinitz and Prime Minister Binyamin Netanyahu. The Knesset Finance Ministry on Monday approved the increase in Value Added Tax from 16% to 17%.
Although Israel's economy has been growing, and still is relatively healthy, Steinitz and Netanyahu, along with Bank of Israel Chairman Stanley Fischer, are increasingly fearful that Israel will get swept up in the tidal wave of bad economic news from Europe. “We need to prove to the world that we are not Spain, and that we can handle our debt,” Steinitz said. “We do not have an insurance policy in the European Union, that countries in Europe do,” and no one is going to bail out Israel to the tune of tens of billions of dollars, the sums received by Greece, Spain, Ireland, and other failing EU economies.
Fischer concurred, saying that “if we do not meet the goals of our debt control, we will end up paying higher interest on government debt, and have a harder time managing the economy. We set a 3% limit on deficit spending, and we must stick to that figure. A higher debt level means a harder burden for coming generations.”
Much of the reason for the increase in VAT – and for a host of other recently implemented “economic edicts,” like increases in income tax rates – is due to recent government generosity, with the implementation of new contracts for government workers, and a series of social programs.
That increased spending has come at a time when government revenues are at best flat, said Finance Minister chairman Moshe Gafni. “For three years the storm has raged in Europe. The economies of the world are collapsing. Israel's economy is strong, but we must deal with social problems. For that we need money, but due to the situation in the rest of the world, Israel's exports are down.” The only alternative to raise money for social programs is to increase taxes, Gafni said. “We can do nothing,” he said, “but then we will end up like Europe.”