From the beginning of his career in the Ministry of Finance, it is clear that Minister Avigdor Lieberman is not seeking the advice of the Bank of Israel. And now, with rising world oil prices rolling to gas stations and expected to fuel inflation in Israel as well, another rift has been revealed between Lieberman and Bank of Israel Governor Amir Yaron regarding the tax on fuel (excise). After the governor called for abandoning the excise tax, which is half the price of fuel, and moving to a congestion charge that is considered a smarter and fairer tax – Lieberman was not left indebted.
The Minister said that just as he did not tell the Bank of Israel how to conduct monetary policy matters, so the Bank of Israel was required not to interfere in the issue of the tax on fuel, which last year generated revenues of about NIS 21 billion for the state coffers. “I do not like advice from the Tribune. I do not give advice to the Governor of the Bank of Israel, not about the banking system, not about interest rates. So here, too, I do not need advice from the side. We know what to do,” Lieberman told the GLC.
But the minister forgot that in addition to maintaining price stability, the Bank of Israel serves in his additional hat as an adviser to the government. In fact, Lieberman’s disregard for the Bank of Israel did not begin today. It began when the Treasury did not include a representative of the Bank of Israel in the committee to change the structure of financial supervision, a move that changed after the governor stood on his hind legs. The trend continued with the establishment of the Economic Cabinet headed by former Governor Jacob Frenkel, went through metro financing, tax increases as recommended by the Bank of Israel, and has now reached the tax on fuel.
The Israeli economy is still exposed to a spike in oil prices
The reduction in the tax on fuel has recently made headlines, due to the surge in oil prices resulting from the war in Ukraine. Some European countries have subsidized the fuel for the consumer and the discourse is rolling to the Treasury and the Bank of Israel. However, European countries found themselves in a more difficult situation in the face of supply disruptions from Russia, as electricity and natural gas prices also rose. On the other hand, in Israel gas prices are signed at fixed prices – so the economy enjoys but is still exposed to a surge in oil prices.
The tax reduction is related to the interests of both parties. The Bank of Israel is interested in curbing the momentum of inflation and the rise in the price of fuel does not contribute to this, since a jump in the price of fuel to a peak of eight years is expected to fuel inflation. This is while the Bank of Israel is expected to raise interest rates in two weeks.
On the other hand, the Ministry of Finance does not want to give up revenue as the tax on fuel provides. Beyond that, Lieberman knows that if there is an opening, it will be difficult to raise the excise tax again. The Bank of Israel, as stated, estimates that congestion tax is the right tool against the negative external impact of congestion on Israeli roads. In their view, without taxation, the individual only considers the cost of time and consumption of fuel. The Bank of Israel explains that a congestion tax will burden the cost of those who choose to travel in their private vehicle during rush hours.
The government has decided to apply congestion charges in the Tel Aviv area starting in 2025, when public transportation services are expected to be at a sufficient level. However, even if a congestion tax is economically optimal, a great deal of preparation is required for it. Also, after subsidizing the price of electricity in February, even before the war in Ukraine, Lieberman cut off the possibility of subsidizing fuel because of the war that jumped prices at stations.
Understand that fuel subsidies will not solve the cost of living
Either way, the fuel subsidy will not solve the cost of living, and both the Treasury and the Bank of Israel understand this well. The Ministry of Finance has launched a broad plan to reduce the cost of living at a cost of about NIS 4 billion.
The program includes a series of measures that will increase disposable income, and encourage employment among the middle class, young families and low-wage workers. Among the measures, a reduction in tariffs that will lead to a reduction in food and consumption products. At the same time, the plan includes a reduction in tariffs on industrial raw materials and construction raw materials, which will help reduce housing prices and renovations. But it seems that the Bank of Israel has other plans, out of purely economic considerations.
Governor of the Bank of Israel, Prof. Amir Yaron / Photo: Eyal Yitzhar
A series of interest rate hikes is expected to neutralize the discount that Lieberman has planned. The Bank of Israel, as mentioned, is expected to raise interest rates – after the US Federal Reserve raised interest rates for the first time since 2018, with the aim of curbing inflation. But in Israel inflation is half as low as in the US, and still exceeds the Bank of Israel target. Inflation in February rose to 3.5% in the last 12 months, compared with the upper limit of the inflation target of 3%.
Restraining inflation by raising interest rates will not necessarily be reflected, since most price increases are attributed to imported inflation, which is not affected by interest rates in the domestic market. But the Bank of Israel does not seem to have many choices, given the strong growth figures of the economy that allow for an increase in interest rates, and especially given the housing prices that have soared by 13% in the past year.