Tax fears weaken shekel

BBC News
April 24, 2002

Israel's currency is hitting new lows, driven down by investors' alarm at the prospect of fresh taxes to combat a swelling budget deficit.

On Wednesday morning the shekel sank 1.4% to a new low against the dollar of 4.85.

The cabinet this week agreed to a capital gains tax and a tax on savings interest, in the hope of raising 3bn shekels ($627m; £433m) to help close the gap in the public accounts.

No Israeli government has succeeded in introducing a tax on capital gains.

But the current situation - with defence bills bloated by 18 months of Palestinian resistance and three weeks of armoured incursion into the West Bank, just as an economic crunch is reducing tax receipts - means desperate measures are needed.

The Israeli media has speculated that the new tax will be set at a rate of 25%. A 1% hike in VAT to 18% is also part of the package.

"We have mobilised for the military challenge," finance minister Silvan Shalom told Israeli TV.

"Now all of us must mobilise to meet the economic emergency we find ourselves in."

Another 6bn shekels in spending cuts and a 4bn boost to the deficit - which some observers now think could climb to over 6% of GDP - make up a 13bn shekel rewrite of the 250bn shekel budget.

Splits

The government has also been considering such radical measures as a public sector wage freeze and a sharp cut in welfare benefits for large families.

This last is likely to dominate a cabinet meeting on Wednesday.

Likud prime minister Ariel Sharon is dependent on the votes of rightwing, ultra-Orthodox Jewish parties for the continued survival of his administration.

One of them, Shas - the third largest party in the coalition - has publicly criticised the planned cuts, which it says impact the many orthodox Jews who go to religious schools rather than performing military service.

Labour union federation Histadrut is also threatening to oppose the moves, declaring a "labour dispute" which could lead to a general strike within two weeks.

Histradrut had frozen several labour disputes in response due to the worsening security situation, but is now threatening to abandon its solidarity with the government.

"We are appealing to Prime Minister Ariel Sharon to personally intervene so we don't have to take strike action," said a Histradrut spokesman.