Despite Smotrich's optimism, the 2025 budget has drawn criticism for its lack of significant reforms and innovative economic strategies. The budget, prepared in coordination with Avi Simhon, the government's economic advisor, who opposes heavy taxation, has been criticized for not including necessary changes in tax policy, such as eliminating tax distortions or introducing new taxes on rental income.
The proposal also avoids measures like canceling the VAT exemption on online purchases up to $75 or imposing VAT on digital services like Netflix, which some argue are essential for addressing the cost of living. Additionally, the budget does not include taxation on rent, partial cancellation of the VAT exemption in Eilat, or the VAT exemption on fruits and vegetables.
Limited Measures Introduced
The budget proposal includes what some describe as "illusory measures," such as canceling the VAT exemption on inbound tourism services—an idea unlikely to gain approval given Israel's current need for tourism. Another proposed revenue source is a 2% tax on undistributed dividends, estimated to bring in NIS 5 billion.
However, the budget has been criticized for stealthily eroding purchasing power by unlinking national insurance benefits and income tax rates, leading to a projected 3% decrease in purchasing power. The budget also proposes increasing provisions for budget pension recipients while waiving wage increases in the public sector, a move likely to face resistance from the Histadrut.
Horizontal Cuts and Concerns
The budget includes NIS 6 billion in horizontal cuts across government ministries, affecting health, education, and welfare. Critics argue that these cuts unjustifiably harm a wide stratum of the population, while coalition funds remain untouched. The flat nature of these cuts, known as a 'stupid cut,' has sparked concern over their impact on essential public services.
As the 2025 budget proposal faces scrutiny, Smotrich and the government will need to navigate domestic challenges and the ongoing financial strain of the war, all while attempting to avoid a downgrade in Israel's credit rating by agencies like Moody's.
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