Fiscal package expect to have a modest impact on inflation

ISRAEL - In Brief 10 Feb 2022 by Jonathan Katz
The government presented yesterday a series of fiscal measures aimed at reducing the cost of living and improving disposable income, including reducing import tariffs on a series of consumer goods and raw materials, reducing the price increase of electricity, subsidizing afternoon kindergarten care, and reducing income tax. The total annual fiscal cost of this package is estimated at 4.4bn ILS, but we assume it will be much lower as increased spending will return to the MoF in the form of increased tax collections (VAT, etc.). Although reducing import tariffs is a positive move, the question will be how much will be passed on to the consumer. With input costs (shipping, commodities) elevated, lower tariffs will most likely slow inflationary pressure, but not lead to price reductions, for the most part. In addition, the boost in disposable income from lower taxation will result in stronger aggregate demand with some inflationary pressure. At this stage, we maintain our lower-than-consensus inflation forecast of 1.9% in 2022.

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