A cutback of more than NIS five billion (USD 1.13 billion) in the 2007 state budget, cancellation of the planned one percent decrease in sales tax, which was executed only a month ago, an increase in the defense budget by at least NIS three billion (USD 680 million) – these are some of the suggestions that will be examined by the senior team established by the Ministry of the Treasury this past weekend following the war in the north.
The team was established by instruction of the Treasury Minister, Avraham Hirchson, in order to make changes in next year's state budget. In addition, the team is supposed to decide upon which changes in budget priorities will be carried out, if needed, in the current year's budget. Already by the end of the month, the treasury is expected to request a cutback of NIS 1.7 billion (USD 380 million) from the 2006 budget of the government offices, in order to transfer it to defense. A small amount of the money is expected to go to the Health Ministry in order to rehabilitate health facilities damaged in the war. The treasury says that there will be no escaping from cutting back education and welfare budgets.
One of the proposals that will be considered is to raise the sales tax by .5 percent starting in January, making it 16 percent, or alternatively, to cancel the one percent tax cut executed on July 1, returning the sale tax to its previous 16.5 percent. Raising the sales tax by one percent increases state income by NIS three billion (USD 680 million).
Hirchson appointed the Director General of the Ministry of the Treasury, Dr. Yossi Bachar, to head the special team, in which Budget Director, Kobi Haber, and Director General of the Israel Tax Authority, Jacky Matza, will be members.
Expected drop in tax revenues
The team will need to grapple with a list of statistics directly resulting from the war:
- A drop of close to NIS two billion (USD 454 million) is expected in 2006 tax revenues in comparison to the forecast of the last months.
- Direct expenses of IDF fighting will apparently reach some NIS 3 billion (USD 680 million) if the war ends by this weekend (August 11) – a month after it started
- If the war lasts about a month, a one percent decline in 2006 growth is expected, in contrast to the conditions on the eve of war. In the first half of the year, the economy grew six percent in yearly calculation.
- According to estimates, NIS 3.5 billion (USD 794 million) in war compensation funds will not cover compensation for direct and indirect damages caused by rockets. Hence, tens of millions of shekels will need to be allocated from the state budget for compensations.
Immediately after the war, thousands of employees are expected to be laid off, especially in the tourism industry. One estimate asserts that the lay offs will include upwards of 5,000 employees, most of them in tourism.
The Ministry of the Treasury is convinced that it will now be difficult to budget activities intended to fight poverty and to support the weak sectors of society.