July 25, 2012- The Israeli Economy Enter Troubled Waters?

Over the course of the last few days, the economic bubble that (at least part of) Israel has been living in, seems to be bursting– in a number of different ways. First, there are clear reports of a slowing of economic activity. Purchases by Israeli consumers are down significantly in the last few months. Activity on Israeli credit cards is down as much as 12 percent.

The second problem, which is only somewhat related, is the government's sudden realization that it's budget was heading off a cliff, and action needs to be taken to limit the deficit-at least the higher pct to which the government had previously agreed. The easiest way to do gather income is to raise taxes. The easiest tax to raise is the V. A.T. (Valued Added Tax). Of course, the problem with raising V. A.T., is that V. A.T. is the most regressive tax in existence. Raising V. A.T. hurts the poor the most (and when we get to the third issue you will see how badly the poor will suffer). When talking about the tax rise today, Prime minister Netanyahu stated that “there is no free lunch.” The social movement demanded some concessions. Netanyahu provided them. Now it's time to pay. Unfortunately, Netanyahu left out some very pertinent points. The Trachtenburg Commission (appointed by Netanyahu), recommended a series of new programs. Most of which were enacted. They also advised a series of ways to pay for the additional new programs. However, the Trachtenburg Commission specifically advocated against raising the V. A.T. Unfortunately, Trachtenburg's recommendations went against some powerful interests that the government did not want to fight. So increasing the V. A.T. is an easy answer- everyone will simply pay more.

Finally, the third difficulty is a story in the making. This morning, the headline of one of Israel's leading economic papers asserted that the median wage in Israel, (a statistic I found when I looked for it a few months a go-and a difficult number to get a hold of), is around 5,500 shekels/month. This is the equivalent of less than $1500/month. To clarify, that means, half of the country earns that amount, or less. Remember, prices here are usually higher than in the United States. So the you see how cruel it is to suddenly raise V. A.T. - and there is V. A.T. here on food, as well as, all other products.