Behind the Headlines Economic Growth Plan for Israel

Lower tax rates and fewer tax concessions are two key elements in a far-reaching economic growth plan now under preparation by the Finance Ministry and the Bank of Israel.

The plan also envisions significant easing of foreign currency restrictions, and a drastic overhaul of Israel’s capital market.

The planning has been accelerated in the wake of the new American tax reform–in part to meet the challenge of the brain drain to the United States.

Finance Minister Moshe Nissim, in a series of interviews over recent days, has deliberately unveiled major elements of the new plan and encouraged public debate.

Behind the scenes he is working hard to garner political support among both major coalition partners for his program–which hinges, he insists, on a substantial reduction of government spending in next fiscal year’s national budget. The budget debate is due to begin in the Cabinet later this month.

NO AUSTERITY MEASURES CONTEMPLATED

Nissim assured interviewers that he is not contemplating a devaluation of the Shekel or further austerity measures (although there has been intense speculation in this direction in some newspapers).

On the contrary, the Israel-European Economic Community tariff-reduction agreements which go into effect January I will mean a lowering in the prices of cars and other consumer durables imported from Europe–and the government has resolved not to make up the shortfall in added purchase tax.

Government planners believe they can drive inflation even lower than the current 20 percent annual rate–despite an anticipated rise in consumer spending–by further substantial cuts in government spending.

Building on the success of the July 1985 economic emergency program, Nissim and bank governor Prof. Michael Bruno, now want to spur the economy into a growth phase. For the worker and for employers, this will mean less direct taxation–and a much simplified taxation structure that will eliminate the myriad concessions and loopholes that now encrust the Israeli system.

AIM OF THE NEW POLICY

“Our policy is aimed at making it worthwhile for people to work,” the Finance Minister told The Jerusalem Post, “(at) encouraging immigration, and at preventing a brain drain.”

Under the present tax structure, wages and salaries are taxed at 60 percent over a margin of around $12,000 annually. This situation has spawned both a massive black market economy and a widespread feeling that work and effort are not worthwhile. Companies, too, are more heavily taxed than almost anywhere in the Western world.

Speaking to Davar, Nissim stressed that there must be no substantial wage rises in the year ahead. He said this was a critical element of his program.

Davar is owned by Histadrut, and Nissim knows he needs the continued cooperation of Histadrut Secretary-General Yisrael Kessar if the recovery-to-growth plan is to succeed. Nissim told Davar that the touchstone of success for him would be a balanced budget for the coming fiscal year.

TOUCHSTONE OF SUCCESS

Certain increases on the expenditure side were already built in, he said: Debt-repayment–including the bank shares which the government undertook to guarantee higher wages for policemen and nurses, two growing population groups that require increased social services.

And certain decreases on the income side had to be anticipated–especially the unlikelihood of any further emergency aid from the United States as had been forthcoming over the past year ($1.5 billion).

To reach a balanced budget would therefore require cutbacks in certain areas, Nissim said. There could not–yet–be public investment in new building and development projects.

Nor could the justified and meritorious demands of the defense establishment, the Education Ministry or the Welfare Ministry be acceded to, “at least in the coming year, though hopefully we may be able to ease up a little in the year after that.” Nissim stated.

Investment, therefore, would have to come largely from the private sector and from overseas. And for this to happen, Nissim said, Israel would need, above all, stability–hence his solid opposition to a devaluation–and the steady confidence of the public in that stability.