The writer is the chairman of the presidency of the business sector
From the moment the Bank of Israel’s decision to raise interest rates was published, some explain it as a necessary solution, and some criticize its harshness. But preciselyA Now it must be made clear that in order to fight the cost of living, it is not enough to raise interest rates, but a responsible policy is needed.
Such a policy does not express populism that strives for sympathy, nor does it express conservatism, but a responsibility that aims to anchor the new point of work that is required for the stabilization of the economy. Every beginning economist knows that drastic changes in the markets must be balanced by the activity of the two governors at the same time – the monetary policy policy, which is the responsibility of the Bank of Israel, and the fiscal policy policy, which is the responsibility of the government.
The Bank of Israel’s interest rate hike currently expresses two key things; One, determination in achieving the goal of curbing inflation, while the other – the absence of an active and balanced policy on the part of the Ministry of Finance. This cannot be expressed only in the containment battles against demands for budgetary expansion and wage increases. It’s just not enough.
It’s time for the right policy
Israel is a country where life is very expensive. Not only in our feeling, but also in international comparison. The expression of high prices can be presented by various indices, one of which is the Comparative Price Level (CPL) index of the OECD. According to it, Israel is one of the most expensive countries in the world. This is a failing grade for politicians and governments.
Faced with the main challenges of the economy, I want to deploy a plan consisting of four policy measures, the implementation of which will help curb inflation and rising prices. The plan includes a focus on reducing production input costs; Encouraging, incentivizing and adopting technologies in low productivity industries, while updating the Law on Encouraging Capital Investments and approving accelerated depreciation regulations for 12 months; Investments in employee training in combination with employers, improving poor human capital and easing regulation and bureaucracy. Under these headings, there is a series of action plans, which will allow the economy to return to stability.
For the sake of illustration, I will refer to measures that can deal with the cost of living. First, it should be understood that the final price that the consumer meets at the point of sale mainly expresses the production costs of those products or services. The government is directly responsible for some of the costs, and has an indirect influence on some of them.
A first example of the government’s direct influence on prices is the price of fuel. The current tax structure on fuel is distorted, so that when energy prices rise, the portion of the excise tax remains constant, but the state’s revenues increase due to the portion of the VAT. From this – the price for the consumer and businesses rises beyond the price of the fuel itself. Within a year, from July 2021 to July 2022, there was A 34% increase in the price of fuel in Israel, and the increase is passed on directly to the consumer.
The solution for us is to continue the temporary excise tax reduction in order to curb the increase in gasoline prices, and reduce the costs of production inputs. This reduction must be maintained at least until inflation is curbed and returned to the Bank of Israel’s target.
A second example of direct government influence is the property tax for businesses. In the current situation, the property tax does not reflect the cost of services provided to taxpayers – the residential property tax is underpriced in relation to the services provided to residents, and the business property tax reflects over-taxation in relation to the price of the services provided by the authorities to businesses. So when you pay more for products, you also pay for excess taxation of the businesses.
Moreover – the mechanism for updating property tax prices leads to a significant and disproportionate increase in business costs. The mechanism, as of today, states that the increase will depend on inflation in the economy and public sector wages. Therefore, not only will the increase in inflation make the property tax more expensive for businesses, but also when they raise the wages in the public sector for teachers, clerks and other civil servants – this price will be passed on directly to consumers.
What to do? First, the property tax for businesses must be immediately lowered and an adequacy created between the total amount of local tax collected, and the amount of local services that the businesses consume. Second, the property tax update mechanism must be changed. These are just two examples of policies that will enable the reduction of production input costs, and from that – an immediate reduction in consumer prices and an impact on inflation.
Our life is precious
As the chairman of the presidency of the business sector, I will present to the elected officials and the treasurer the necessary policy measures. At the same time, as citizens we need to remind the politicians who want us to elect them – that the responsibility lies with the government. Our lives are too precious for us to agree that you will not take responsibility.