Israeli Gov’t Announces Plan To Ease Effects of Inflation

Israeli Gov’t Announces Plan To Ease Effects of Inflation

Experts say that at this stage, the plan is ‘reasonable’ but real reform, to break up monopolies and reduce bureaucracy and overregulation, requires long-term planning

The Israeli government announced a series of economic measures on Wednesday aimed at lowering the cost of living and mitigating the effect of inflation on citizens.

Israeli Prime Minister Binyamin Netanyahu and Finance Minister Bezalel Smotrich spoke at a press conference in Jerusalem and introduced the steps. According to Netanyahu, they “will immediately reduce the monthly expenditures of every family in Israel, and … slow the pace of the price increases and will begin to turn things around.”

The planned measures include a freeze on property tax for a year, cancellation of the recent increase in the price of fuel, a drop in the price of electricity, cancellation of the rise of electricity prices for medium- and small-sized businesses, heating subsidies for families in need, a reduction in the water rates, an increase in national insurance support payments, and reduced deductions in national insurance and health tax for people in the workforce.

“This is not a comprehensive plan, rather putting out a small fire by gently trying to prevent prices from rising higher,” said Shlomo Maoz, an Israeli economist who has held leading positions in both private firms and public service. “But at this point in time, for a new government, this is reasonable.”

According to Maoz, none of the steps constitute a thorough plan or solution. This is a respite for concerned Israelis, who will continue to deal with soaring prices.

“It is a mild sedative,” he described.

The Netanyahu government was sworn in two weeks ago, on the heels of a global financial crisis. During the election campaign, Netanyahu vowed to combat the high cost of living in the country which is troubling many Israelis.

According to the OECD (the Organization for Economic Cooperation and Development) data from 2021, Israel has the second highest price level index among OECD countries. The inflation forecast, however, is significantly lower than other countries.

Israel’s economy is quite strong, and forecasts expect it to grow well into 2023.

The steps taken by the government will likely make only a small dent in the burden that many Israeli families carry daily. They do not address the core issues that affect the economy and began long before inflation started taking its toll across the globe.

“One of the things that need to be tackled is to significantly reduce the number of workers in the public sector,” said Maoz. “This could lead to a drastic reduction in taxes in the long run.”

Israelis pay one of the highest rates of income tax in the world. Coupled with the high cost of living and now inflation, the pockets of Israelis are shrinking.

The Bank of Israel (BOI) has also gradually increased the interest rate since last year and it is now standing at 3.75%. Mortgages are getting more expensive but have yet to alleviate Israel’s biggest headache – housing.

Netanyahu also promised to tackle the raging housing crisis, which peaked during his previous terms and is nowhere near being solved. This was not addressed by him or Smotrich on Wednesday, with both realizing the issue needs more than just a Band-Aid.

“This was the elephant in the room,” said Moran Ofir, an associate professor at the Harry Radzyner Law School at Reichman University and a visiting fellow at the London School of Economics.

According to the Israeli Central Bureau of Statistics, housing prices rose over 20% in 2022, while inflation has risen 5.3% in the past year.

“After campaigning for lowering the cost of living and promising to deal with the housing crisis, one would expect them to have a plan to tackle these issues already,” said Ofir, acknowledging the nascent government. “Planning for this should have started yesterday.”

While inflation in Israel is lower than in many developed countries, the numbers can be misleading. With such a high cost of living prior to the crisis, Israel just had a smaller gap in the change compared to other countries that entered an inflationary period with lower prices to begin with.

Israel is in dire need of reforms in the high number of monopolies that exist in the Israeli market. Also, a massive reduction in bureaucracy and regulation is needed to reduce prices.

This is the work waiting for Smotrich, who vowed to reform the economy while campaigning.

The government still must approve an annual budget. That is when its true intentions will be made clear, and the public will know whether real reforms are on the horizon.

But it was politically important for Netanyahu and Smotrich to present the public with a program, regardless of how little its impact will be.

“This is exactly how to ‘buy’ quiet,” said Ofir. “The plan gives the people a feeling that something is being done.”

Ofir refers to the “present bias,” in which people prefer a quick benefit in the present rather than wait for a larger reward in the future. Netanyahu and Smotrich were banking on just that.

They also presented the measures as “cutbacks,” but really, they are a scaling down of recent and expected price hikes. For example, utility prices increased in January. Now they will be lowered, but not to below their pre-January level. Thus, consumers now pay 8% more for electricity than they did in 2022; with the new plan, this will be reduced to a 6% price hike.

Netanyahu, who once served as Israel’s finance minister and is credited with shielding the country from the 2008 subprime crisis which toppled many economies in the world. As Israel’s longest-serving prime minister, he oversaw policies that saw record-low unemployment rates, fast growth rates, and a low government debt-to-gross domestic product ratio.

Perhaps it is this part of his experience that led to the restrained measures announced by him and the minister of finance.

“This is not a program that will destabilize the Israeli economy, and this is very important,” said Ofir.

Any further measures would have required significant government expenditure. Earlier this week, the BOI released data showing Israel ended 2022 with a budget surplus of almost $3 billion. This was due to a rise in tax revenue.

But 2022 was also a year that saw a massive decline in investments in Israel’s previously booming tech sector, which is considered the engine behind its growth in recent years.

One of the major reforms Netanyahu mentioned was the subsidizing of day care for children from childbirth until the age of 3, which currently is fully privatized and is considered a major burden on working parents.

“This would make a real difference,” said Maoz.

The coming year will be challenging for those at the helm of the Israeli economy.

“We have held a series of discussions in order to formulate a plan while keeping to the budgetary framework and without breaking the principles and rules and fueling inflation,” said Smotrich at the press conference in Jerusalem, “This is an immediate, emergency plan, and in the framework of the state budget … we will formulate major steps and a series of deep reforms.”

“The fruits of efficiency reforms are only seen after a long time and an extensive amount of effort,” Ofir concluded. “There was no indication that there is any long-term planning in this direction.”

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