The Bank of Israel threw its support Thursday behind a Finance Ministry plan to abolish customs duties on various household items and offer young working families tax credits, but said that the measures should be made permanent to help the economy.
Israeli media have reported that Finance Minister Moshe Kahlon’s plan had upset the Likud party, as the measures had not been coordinated with them. But the government has been under pressure to lower the price of essentials like childcare and consumer goods as well as housing since 2011, when hundreds of thousands of Israelis took to the streets to protest the high cost of living.
Kahlon announced the plan, estimated to cost NIS 4 billion annually, earlier this week as part of a drive to reduce the cost of living.
“As they are measures that respond to structural problems, and are not coming to serve a transitory need to stimulate economic activity that is robust in any case, it is important that the measures be permanent and are not terminated after a year and a half,” the central bank said on Thursday.
Bank of Israel Governor Karnit Flug in March urged the government to use excess tax revenue to invest in infrastructure and education rather than cut taxes further.
“At this stage, it is difficult to assess the precise cost of the measures announced, as some of them are not completely detailed; and they differ in the dates they go into effect, the period to which they apply and the process required for their approval,” the bank said in a statement.
The plan uses a significant portion of a reserve for special needs set aside in the 2018 budget, the bank noted.
Assuming that the measures are permanent, additional funding will need to be found to ensure the ability to meet fiscal targets for 2019–20 while continuing to moderately reduce the country’s debt to GDP ratio, it added.
Israel’s public debt fell to an estimated 62.1 percent of economic output in 2016 from 63.9 percent in 2015, but that ratio remains well above that of similarly rated countries such as Slovakia, Chile, Slovenia and the Czech Republic.
“In addition to the plan presented, it is important that the government continue to take policy steps that will lead to improving the economy’s human and physical capital infrastructures, thus increasing the economy’s long-term growth potential,” the Bank of Israel said.