Happy calendar year! Sunday, January 1, 2023, sees a wave of price increases, most notably for electricity, fuel, and water. Of those, the incoming government is considering freezing the electricity price hike and suspending the excise tax on gasoline, as a first step in lowering the cost of living in keeping with the coalition agreements. After all, energy is the major factor in setting the cost of consumer goods and services.
At 1 PM, Sunday, outgoing Finance Minister Avigdor Liberman will welcome his successor, Bezalel Smotrich. At this point, according to Kan 11 News, the new Finance Minister does not plan to introduce immediate measures to freeze prices. Instead, he plans to include lowering the cost of electricity in the new budget.
On its face, the government cannot change the price of electricity in Israel. According to the Electricity Sector Law, the Electricity Authority sets electricity rates and updates them from time to time “solely according to its professional discretion.” According to the law, the rates are set based on the “cost principle,” meaning the price is derived from the cost of producing electricity. These costs are divided into four segments: production (fuel costs and operating expenses); the cost of managing the system; the cost of transmission and distribution; and the cost of the service to the consumer (supply).
According to the Electricity Authority, the main reason for the new price hike is the increase in coal prices in the world by more than 100% over the past year. Coal is the source of fuel for 23% of the electricity produced in Israel, and when the cost of production increases significantly, it leads to an increase in electricity rates.
The simple way to bring down the cost of fuel for the Israel Electric Company is to reduce or suspend altogether the excise taxes on fuel. Liberman did that for the duration of the last election campaign and revived them, because he could, on the night between November 1 and 2, 2022. Obviously, Liberman gives cynicism a bad name.
But if Finance Minister Smotrich follows suit and freezes the excise taxes outside the context of overall government expenditure, he would bring immediate relief to consumers without taking care of all the other factors that generate outrageous prices in Israel, most crucially inflation and the steep rise of interest rates. Instead, he will likely opt for dealing with the broader economy through the 2023 budget.
Smotrich wants to see the government get out of managing prices in the marketplace, including, eventually, essential consumer goods such as bread, oil, eggs, and milk. He proposes compensating needy families directly rather than subsidizing production, alongside a massive reduction of taxes, pushing competition to promote small businesses, and solving issues related to the ports to facilitate the flow of competing imports.
He also proposes taking steps to dismantle the food monopolies in Israel through active regulation. He suggests that when prices are dictated by true market competition, there would be no need at all to control consumer prices of essential goods.
I recommend my report on Smotrich’s lengthy interview with Kan 11’s chief economic correspondent Shaul Amsterdamski. It was broadcast last August and contains his cogent and effective plan for his tenure as Finance Minister (Bezalel Smotrich Lays Out his Economic Agenda: Free Market, No More Subsidies or COLAs).
As of Sunday morning, gas prices at the pump went up 9 agorot, bringing the max for 95 octane gasoline to NIS 6.94 per liter ($7.88 per gallon). Electricity is up 8.2%, after an earlier hike of 13.3%.
Municipal property taxes go up this month by 1.37% – not based on a government decision but on an automatic formula imposed on all the municipalities. At least one municipality in central Israel that asked to suspend the hike because its finances are in very good shape, was warned by the Finance Ministry that this would constitute a violation of the law.
Yes, Israel very much needs a free-market economist to save it from its tightly-centralized system. The last free market faithful to do it was one Benjamin Netanyahu, who healed the country’s economy by taking the necessary draconian measures. The nation paid him by decapitating his Likud party down to 9 Knesset seats.
Good luck, Mr. Smotrich, we have your back.
