New Israeli taxes are steps towards a $25-30bn war budget

DEBKAfile – July 27, 2012

The Israeli government convenes Monday, July 30, to approve an austerity-cum-taxation package entailing a 5-percent, across-the-board cutback in government ministry budgets to raise NIS 1 billion, or $250 million, in revenue; a tax hike will yield another NIS 3 billion, or $750 million. Both steps will generate an estimated total income of about one billion dollars.

Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz explained Wednesday, July 25, that these measures are vital to save Israel from economic decline like Germany, whose credit rating turned negative this week, or disaster like Greece and Spain which teeter on the brink of bankruptcy. Even America’s economic troubles are cited as worth avoiding.

Beer and cigarettes went up that night as a foretaste of the new measures.
Government leaders warned that the new steps were just the first round of further cutbacks and tax hikes in store for 2013. They are estimated to realize a further revenue injection of NIS 20 billion ($5 billion). 

The first package was produced this week at an emergency economic marathon led by the prime minister, Bank of Israel Governor Stanley Fischer and other heads of the economy. The public was informed that the most urgent item on its agenda was ways and means of keeping Israel’s annual deficit within the 3-3.4 percent limit despite rising calls on the national purse. In every statement, ministerial spokesmen stressed that more tough measures were in store after the current round.

But for now, the education, social welfare and defense budgets remained untouched.

Some critics of Netanyahu government critics blame its policy of overspending in response to a wave of social protesters; others resent the one percent hike on VAT on purchases as hitting low-income groups.

At the same time, debkafile’s sources in Jerusalem report that Netanyahu and Steinitz have rightly turned genuine economic difficulty into a lever for getting the country on track for a war economy, without saying this in so many words.

They have therefore avoided discussing the consequences of the new measures – aside from a cap on the national deficit – or their duration. Israel’s leaders appreciate that the country is perilously close to war but they can’t tell for how long it will last or how it will end.  A short war might boost economic development while a long conflict costing billions would require more belt-tightening.

Gone are the old days when an embattled Israel was able to ask and receive from Washington easy-term loans to cover its war costs, military hardware gratis to replenish depleted weapons and ammo stores and/or international loan guarantees. Today, Jerusalem knows that given the present state of the US economy and the possibility of Israel having to act unilaterally against Iran, it will have to come up with its own war funding.

This week’s marathon most certainly went past economic steps to ponder cost-accounting relative to the number of countries potentially at war with Israel as critical to size of the defense budget. Cost estimates swing wildly between an operation against Iran, facing Iran, Syria and Hizballah together for a long or short conflict, or a possible contest with Egypt to purge Sinai of terrorists.

Netanyahu and Defense Minister Ehud Barak gave part of the game away about the dual purpose of the new measures in the comments they made Wednesday and Thursday, July 25-26.

Both used an interesting tactic:  First, they focused on the dry facts and figures of government spending, is deficit, revenue etc. but they then made speeches about the new security dangers facing Israel and the high cost of repelling them.

Netanyahu said that recent regional regime changes mean that Israel has to spend more on defense to maintain its balance of strength and face the challenges of a nuclear Iran, missile threats, cyber warfare and a colossal influx of weaponry to the region “which are in certain hands today and may be in others tomorrow.”

There is no knowing how Bashar Assad means to use Syria’s large stocks of chemical and biological stores, which way the Syrian situation is destined to develop, or against whom Israel may be called upon to fight.

He cited the cost (NIS1.4 billion) of building the security fence along Egypt’s Sinai border for the first time after three decades of treating this frontier as a border of peace.

How much would it cost to send troops into Syria to seize control of Syria’s unconventional war stocks and prevent their use against Israel? A large Israeli force would be needed for this preemptive raid. But what then? Do the soldiers’ stay on guard indefinitely, remove the stock from Syria or destroy it regardless of collateral damage? Those options would carry a price tag in the range of $1-2 billion.

The prime minister left the nuclear issue to the defense minister.

Barak took the opportunity of a graduation ceremony at the Israeli National Security College Wednesday, July 25, to say: Israel might have to make “tough and crucial decisions” about its security and future. “I am well aware of the difficulties involved in thwarting Iran’s attempts to acquire a nuclear weapon. However, it is clear to me that without a doubt, dealing with the threat itself will be far more complicated, far more dangerous and far more costly in resources and human life than thwarting it”

This was a broad hint at Israel’s sense that it has no choice but to attack Iran’s nuclear program because the cost of inaction would be far greater.
Barak also commented that the lesson Israel has drawn from the Syrian calamity is that when it comes to a security crunch, Israel can only rely on itself.

While all the official statements focused on saving the Israel economy from drowning in the maelstrom of the global crisis, debkafile’s military and Jerusalem sources noted that nothing was said about the sources of replenishing the drain on the national coffers of fighting a war.

A clue may be found in the offer made by the finance minister of big tax breaks for three big multinational companies operating in Israel – Intel, Teva and CheckPoint – in return for their consent to plow their local profits back into Israel.

The accumulated amount mentioned is NIS 100 billion ($25 billion) for which they would only be charged 3 percent tax.

Steintiz would not have discussed this deal in public had it not been approved in principle.

debkafile’s analysts conclude that if this sum can be made available to the Israeli economy in a war crisis, the national deficit could be kept at a manageable level and foreign capital discouraged from fleeing the country. It therefore looks as though the Netanyahu government is digging the Israeli economy in to weather a war and setting up a strategic financial reserve in the range of $25-30 billion, and perhaps more, for the worst-case scenario.

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