Israel's Economy Wrecked By War With Palestine

by Lorys Charalambous, Tax-News.com, Cyprus

24 April 2002

Heavy military spending and a collapse in economic growth have made a nonsense out of Israel's budgetary projections for this year. The government had pencilled in 2% growth, after the economy contracted 0.6% last year, but economists are saying that the best that can be expected is a flat result.

Tax receipts have collapsed as a result of economic problems, and the government has been driven to construct an emergency programme to avoid a fiscal crisis later in the year.

Ariel Sharon, Israel's prime minister, last night agreed the outline of a US$2.7bn programme which will be put to a cabinet vote on Sunday and then to the Knesset.

Even though the package includes a 2.5% cut in spending programmes, the deficit will widen from a planned 3% of GDP to between 3.5 and 3.9% of GDP.

Receipts will be bolstered by a series of new taxes, including an increase in VAT from 17% to 18%, increased excise taxes on cigarettes and petrol, and a "war levy" on salaries amounting to 1 per cent of gross wages. A capital gains tax is also being considered.

Silvan Shalom, finance minister, said the plan was designed to head off an economic crisis and help revive growth. But David Klein, governor of the Bank of Israel, warned that new taxes would undermine attempts to boost growth, and that allowing the deficit to increase would force the central bank to raise interest rates.

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