Finance Minister Bezalel Smotrich held a press conference earlier this month to discuss his upcoming budget. Due to lack of tangible information, there was little to relate to in terms of the budget itself. The plan Smotrich presented was vague, key numbers were missing, and key questions remained unresolved. What the minister of finance did present however, was his perception, based on the proposals of his office, regarding the proper way in which war expenses should be financed.
Alongside ideas with little economic benefit (the “war on ‘black capital,’” an Israeli term for unreported capital, that has been going on for a decade) or symbolic (cutting the salaries of senior executives,) it seems that the center of the plan is two freezes: one on the revenue side, which involves freezing income tax rates, and one on the expenditure side, which involves freezing entitlements, public sector wages (which he claims he discussed with the Histadrut), and the minimum wage. According to Smotrich, these proposals were discussed with the Histadrut. The real money is in these freezes, which are actually just budget cuts by another name. Cuts that will deal a brutal blow to the public sector workers, and to the weakest in society, when put into effect.
The freeze is really a cut: Freezing entitlements and wages seems to insinuate that some kind of status quo is being maintained. In reality, such freezes are budget cuts for all intents and purposes, for although incomes may be frozen, prices will continue to rise.
According to Bank of Israel forecasts, prices will rise by 2.8% in 2025. If entitlements and wages don’t increase alongside prices, then they erode at a similar rate: the same amount of money will be able to buy fewer products. For the weakest sectors of society—disabled people, recipients of income support, and anyone else who relies on government allowances for their daily existence—this will cause real harm to their standard of living. It means fewer items at the grocery shop. This freeze is proposed to be accompanied by an increase in value-added tax (similar to sales tax) of one percentage point, which shaves a little more off the purchasing power.
Such a cut also hurts the economy. Pension recipients spend roughly all of their money on consumer goods. A 2.8% cut in their income creates a similar cut in the income of everyone who sells their products to them: farmers, business owners, supermarkets, etc. The Ministry of Finance does not seem to recognize how the poor and the middle class drive the economy.
The freeze will increase tax rates: Another element of the proposal is an increase in taxes, which is also done by means of a freeze. But the meaning of this step is more positive: it has a relatively progressive potential, and it is not expected to widen gaps.
The mechanism of how a freeze can become an increase is a bit complex. The income tax system in Israel is based on a kind of ladder—the higher the rung, the higher the tax rate you pay. In order to keep up with the rate of salary increase, the rungs are linked to the average salary. Given that most salaries increase every year, the freeze on the rates means that a larger portion of the salary will be taxed at a higher rate.
Unlike the VAT increase, which generally comes at the expense of the poor, an indirect increase in the income tax hurts everyone according to their income. And so, the weakest who are below the lower tax bracket will not be harmed by the move.
The double blow for the public sector: At the press conference, the minister of finance said that he also hopes to bring about a wage freeze for the public sector—that is, a freeze of the framework agreement that was signed a little over a year ago.
This is a very problematic proposal, seeing as the framework agreement was signed after a long time in which there was no agreement. During this period, the working wage eroded due to high inflation. In order to finance the war, workers gave up a paid vacation day—a decision with an additional financial cost.
Above all, there is no justice in inflicting a double blow to the public sector alone—both by raising taxes (freezing tax rates) and by freezing wages. While the increase in taxes can be justified as equalizing the burden, the wage freeze is nothing but an imposition of a special tax on workers simply because they work in civil service.
At the press conference, Smotrich described the massive mobilization of public sector workers during the war. Perhaps it is worth reminding the minister of finance that the salary erosion in recent years has made it very difficult to recruit new public sector workers. Is it really the time to give them less and demand from them more?
There are alternatives: Although most economic commentators are quick to praise Smotrich for his readiness for “painful decisions,” there are alternatives to this treasury proposal. First, the decision to return to a lower debt-to-GDP ratio so quickly is not bound by reality. In the middle of a war, it is possible to contain another year of a deficit greater than 4%. As Smotrich himself said, there is no reason to get so excited about credit rating companies. If you really care about the debt-to-GDP ratio, you can also seriously take care of the other side of the equation—the GDP—by strengthening growth engines.
There are also alternatives that can increase the state’s revenues: it’s possible to raise the corporate tax, cut the tax benefits that large corporations receive, increase taxation on capital and assets, and more. Smotrich must reconsider the values at the base of his proposal. The nation’s wealth should not come at the expense of the most vulnerable people, especially in times of war.
This article was translated from Hebrew by Etz Greenfeld.
