State revenues from taxes in 2024 are expected to be NIS 33 billion below the forecasts before the start of the war, according to the latest budget proposal presentation for the coming year.

According to the forecast, weakness in corporate taxes and real estate taxes was already acute at the end of 2023, and this trend will continue into 2024. To this will be added a slowdown in the growth of private consumption, which will translate into declines in the collection of VAT and import taxes.

So amid price rises in the private sector (Tnuva, Strauss, etc.), the government will also put its hands deeper into our pockets. Many government products and services have seen significant price increases, and others will become more expensive later in 2024. Some, such as electricity and fuel, are significant inputs of production in the private sector, so their increase in price could be translate into price rises for other products. Already today, this is a monthly addition of several hundred shekels on average per family, which goes directly to the public purse.

Excise duty fell and has been put back up

One of the most significant price increases has been on gasoline. Throughout most of last year, the government reduced the excise duty on gasoline despite the rise in oil prices on world markets in order to keep gasoline prices low. As part of the cuts to the state budget for 2024, the excise cut was canceled, which in 2023 had cost the state over NIS 1 billion in lost revenue. Consequently the price of unleaded 95 octane gasoline at gas stations has increased since the beginning of the year by NIS 0.28 per liter, to NIS 7.22 - the highest price in 18 months.

Another increase is in electricity, the price of which is determined every year by the Israel Electricity Authority according to a range of inputs. Electricity rates rose on February 1 by 2.6%. The authority attributed the price rise to, among other things, the rise in the Consumer Price Index in the past year, the rise in interest rates, the continued development of the electricity sector, the increase in IEC layoffs, enhancing reliability of electricity supply, and cutting air pollution.

According to the official formula of the Electricity Authority, the price increase was supposed to be much sharper and reach 13%. In order to mitigate the price increase, the Electricity Authority priced in the funds that should be received later this year from the sale of the Eshkol power plant. The station is in the process of being sold to Dalia Energy for NIS 9 billion. Of this, the Electricity Authority is expected to receive about 4 billion shekels to reduce the tariff.

In addition, water rates recently rose 0.7% to complete a jump of 5.9% in the last two years. This price is also determined in a formula by the Water Authority, and it includes an average of the production costs from various water sources such from the Mekorot national water company, the purchase of desalinated water and costs of wastewater and sewage treatment.

Another price calculated by a formula is the local authority tax - arnona. The tax increased by 2.7% in 2024, after rising 1.4% in 2023. Due to agreements in the public sector and continuing inflation, it will likely continue to rise in 2025.

Health tax

Another price set to rise is the cost of state health insurance. By law, every Israeli is entitled to health insurance through of the four health insurance funds, in return for a state health insurance tax deducted from wages. The tax comprises a lower rate up to 60% of the average salary, and a higher rate above 60% of the average salary. In order to reduce the extensive deficit created as a result of the war, the health tax will increase in the lower rate from 3.1% to 3.25%, and the higher rate from 5% to 5.15%. In effect, the government is imposing an additional income tax of 0.15% of the salary.

Another negative effect on wages introduced following the war will be a one day reduction in the annual recreation payment employees receive. The government's decision on this was with the agreement of the Histadrut. The cost will be collected in full from the employer as usual, but will be transferred directly to the state as a kind of tax. In addition, as part of the budget, it was decided to freeze the value of the recreation payment in 2024, so it will not rise in line with inflation.

The VAT hike will wait until 2025

The most significant cost to the economy and the general public has been temporarily postponed until next year. This is a decision to increase VAT from 17% to 18%, starting in 2025. For the state, the VAT increase will bring in NIS 7.5 billion, according to the forecast.

And the bottom line is that the tax hikes still do not cover the hole in state revenues. In June 2023, the Ministry of Finance published the multi-year plan for 2024-2027, with a tax collection forecast for 2024 of NIS 450.4 billion. Following the war and the economic trends that preceded it, the forecast was revised to NIS 417.4 billion.

The trend of declining tax revenues began before the war. In 2023,  state revenues from taxes and fees amounted to NIS 412.2 billion, down 9.3% from 2022. With this deepening hole, the state must impose more taxes on the public, chief among them, the VAT hike.

Source - Globes - Image - Tali Bogdanovsky