The Iron Sword War brought the country to very large expenses due to security needs that jumped all at once, and due to the need to assist evacuees from the Gaza envelope and the northern region. These needs are only the beginning of the burden that will fall on the state budget, because down the road it will be necessary to dramatically increase the defense budget in Israel, in order to adapt it anew to the threats facing Israel.
Fruits in Finance Committee: Heads of Judea and Samaria Councils Demand Not to Vote on State Budget | Knesset Channel
Against this background, the question arises: how will the state deal with these large expenses? By imposing taxes on the public in order to balance the state budget, or by taking money loans from other countries in the world. We referred these questions to Professor Alice Brezis, Director of the Azrieli Center for Economic Policy and Director of the Macro-Israel Forum at Bar-Ilan University.
"In the current state of big spending, what is expected of the finance minister is responsible policy, one that will take into account the good of the entire country and not the good of the voters and his sector." Prof. Brezis says, adding: "Unfortunately, until now the finance minister has acted in favor of his sector. Second, the finance minister also acts as if he already understands everything in the field of economics, and this is not the case. He should show humility in the field," says Prof. Brezis.
Defense Minister Galant and Gantz held an assessment of the situation in the northern Gaza Strip, photo: Shahar Yurman
In addition, Prof. Brezis notes that the budget problem does raise questions about whether the government will impose taxes on the public. In her opinion, this should not be done. "First, before we even talk about what needs to be done, the Finance Ministry will wait to see what the state's expenditures are. That is, what its economic needs are. After that, the treasury will ask to see what the state's tax revenues are. Here, by the way, it should be estimated that state tax expenditures will decrease, because there are many people in the reserves who do not work. There is a halt in activity in entire industries such as construction, agriculture and the entire self-employed sector, so it should be estimated that the state's revenues will decline.
"After these two figures are received, the Ministry of Finance will examine the gap between expenditures and revenues. That is, what deficit the country is in. If the deficit is less than four percent, then no taxes will be imposed. If it exceeds five percent, taxes will be imposed. But here, it is important to note, the amount of income tax in Israel is already very large, and we are reaching the moment that if it rises more, then people will already start looking for ways not to pay tax and the state's tax revenues will decrease. This situation is called the Laffer Curve. This curve shows that starting from a certain level of tax collection, revenues actually do not rise, but actually decrease.
Evacuees at Binyanei Ha'uma, photo: None
"I say this against all the leftists who say, on the contrary, to impose more taxes on the rich. What I do advise is to raise VAT by a percentage, here the state will earn about $7 billion, which will reduce its deficit enough. Here, too, there is the Laffer curve, but we are not in this case at the moment."
Beyond imposing a percentage of value added tax, Prof. Brezis touches on one of the sore points in Israel – the percentage of employees "in black". "In Israel, according to various research tests, over 20 percent of workers and business owners work in the black. There are literally houses where you can see a hairdresser, or a beauty salon, or any other kind of business, and the landlord claims that he doesn't work at all.
Apartments for evacuees in Maoz Daniel's Ramat Gan, photo: courtesy of Maoz Daniel
"The harsh reality means that the state actually loses about 20 percent of the taxes it deserves. If here there is a deepening of collection, so that the tax authorities act strongly against tax evaders, no one will shout and the state will benefit from it," explains Prof. Brezis.
Regarding the question of whether there will be price increases in the economy and a surge in inflation due to the fact that the price of gasoline increased this month and the price of electricity is expected to increase next month, Prof. Brezis noted that such increases are also highly dependent on the conduct of the Minister of Finance and his relations with the Governor of the Bank of Israel.
Price increases, photo: GettyImages
"No one will tell you now with certainty whether we are on the verge of price increases, or whether the situation is fiscally stable. The reason for this is that, on the one hand, the exchange rate has fallen and the shekel is stronger, which prevents price increases, and on the other hand, there are importers who raise prices.
In any case, we see that the Governor of the Bank of Israel slightly lowered the Bank of Israel interest rate. There's a hint here to the finance minister, like: 'Did you want me to lower the interest rate and make things easier for the people? So you, on the other hand, will manage a responsible budget.' This is a kind of dialogue between the Governor and the Minister of Finance, in our complex reality, and it must be said that if the Minister of Finance does not understand this discourse, we will no longer see interest rate cuts, but even interest rate increases back, in order to stabilize the economy. In other words, everything depends on the finance minister at the moment."
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