The fuel tax cut proposed by Smotrich: full throttle to the ballot box

Finance Minister Bezalel Smotrich announced today that he has ordered the promotion of a reduction in the excise tax on fuel to prevent the expected fuel price hike on Tuesday. However, the minister did not prepare for this in advance with the professional staff at the Ministry of Finance and the legal department. Now, due to the proximity of the elections, the decision is under official review by the Ministry of Finance's legal counsel. Sources in the Ministry of Finance confirmed to Calcalist that a meeting on the subject did indeed take place, but there is no finalized outline yet.

It was published today that on September 1, fuel will become 16 agorot per liter more expensive, and its price at self-service will stand at 8.25 shekels per liter — a 14-year record. The price of fuel in Israel is derived from the price of fuel in the Mediterranean basin, the exchange rate, the marketing margin, the excise tax, and the VAT. The formula is intended to pass on both increases and decreases to the consumer, but Smotrich decided to try and break the mechanism.

The Finance Minister's announcement is almost a dictionary definition of election economics. Not because the state is forbidden from intervening in fuel prices, but because the intervention is one-sided: when oil and gasoline in the world become cheaper, the state allows the price at the pump to drop and collects the full excise tax, but when they become more expensive, suddenly the tax becomes a problem and the Finance Minister rushes to "protect the public." If the government leaves the decreases but neutralizes the increases through tax reduction, it turns the mechanism into a political one.

Economic populism is not just "handing out money." It is characterized by granting an immediate, tangible, and popular benefit, while its cost is deferred, spread out, and hidden from the public. In this case, the benefit is seen immediately on the sign at the gas station, while its price will appear much less photogenic in the deficit, the debt, or the need for cuts and tax increases in the future. This is exactly the gap between economic policy and election economics.

The claim that this is an "external crisis" is also not particularly convincing. Israel has been operating under war and security uncertainty for almost three years. Energy prices have risen and fallen during this period more than once. The difference now is the approaching elections, and a price of more than 8 shekels per liter is a figure that no politician wants to see on gas station signs weeks before the public goes to the ballot box. After all, this is excellent material for the opposition's campaign against the government — as Prime Minister Benjamin Netanyahu himself did in July 2022 against the "change government."

And most importantly: reducing the excise tax does not make the cost disappear. It only transfers it from the pump to our children's pockets. Instead of the driver paying, the state waives revenue — and must finance the discount by reducing investment in services for citizens, raising taxes, or increasing the debt that future generations will be forced to pay with compound interest. This is especially problematic when the Bank of Israel already estimates that the deficit in 2026 will reach 4.9% of GDP, and even about 5.5% if the defense budget is increased.

The opposition of the professional staff at the Ministry of Finance to Smotrich's blatant populist move stems from another reason: it is a regressive benefit. If one wants to help households affected by the cost of living, it should be done in a targeted manner. A sweeping excise tax reduction mainly benefits those who drive a lot and consume more fuel. It is irrelevant to those who use public transport and to those who are environmentally conscious and have purchased an electric vehicle. Furthermore, the move creates a dangerous precedent: the public will get used to the fact that the price can go down with the market, but it must not go up with it.

It only remains to hope that the public is smart enough to understand that they are being played and that there are no free lunches: either you pay at the register at the beginning — or to the waiter at the end. Israel consumes about 4.3 billion liters of gasoline per year. Therefore, a reduction of 10 agorot in the excise tax on gasoline means waiving about 430 million shekels per year. A reduction of 20 agorot is already worth about 860 million shekels, and a reduction of 30 agorot — the threshold relevant to the current move, which will bring the fuel price to less than 8 shekels per liter — is about 1.3 billion shekels on an annual basis. Since VAT is also imposed on the excise tax, the total loss of revenue in the case of a 30-agorot reduction approaches about 1.5 billion shekels per year. If the reduction remains in effect from September until the end of the year, it is a loss of tax revenue of about half a billion shekels.

Smotrich can argue in return that the Finance Minister in the "change government," Avigdor Lieberman, also carried out a similar move in April 2022. But then the environment was completely different. First, the government then enjoyed a budget surplus. That is, revenues were higher than expenses. Although now there is a pleasant surprise on the deficit side, which stands at "only" 3.3% of GDP instead of 4% as predicted, it is still an abnormal deficit — after three consecutive years of high deficit. Moreover, expenses are temporarily low, partly due to the continuing budget. The Bank of Israel itself warns that expenses are expected to rise due to the expected jump in the defense budget. The Bank of Israel's baseline forecast is a deficit of 4.9% in 2026, and if the addition to defense reaches the scope being examined in the government — it will stand at 5.5%. The jump in defense spending is expected to erase that same imaginary "surplus" that Smotrich and his colleagues in the Ministry of Finance are talking about — already in the coming months.

The energy shock is also not similar. At the beginning of 2022, Brent crude oil was trading at about 78 dollars per barrel; within two months, following the Russian invasion of Ukraine, it jumped by more than 70% to up to 133 dollars per barrel. Today, despite the war with Iran and the tension in the Gulf, oil is trading below 90 dollars. That is, in Lieberman's case, one could at least argue that it was a temporary response to a historic energy shock, done when the fiscal situation allowed it. With Smotrich, both conditions are not met: there is no budget surplus and there is currently no parallel jump in oil prices. What there is — is approaching elections.