The Cost of Arak and Israel's Budget Deficit

The Cost of Arak and Israel’s Budget Deficit

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By Samuel Scott

TEL AVIV — Arak, the unofficial drink of Israel and other Middle Eastern countries, is a colorless, unsweetened, anise-flavored liquor that turns translucent and milky-white when traditionally mixed with water and ice. And the price of arak and other cheap alcohol here is set, by some estimates, to more than double on July 1.

The new tax on the popular drink — favored especially by poor and working-class Israelis as well as those Mizrahim with familial roots in Arab countries — is, perhaps predictably, deeply unpopular. As Liel Leibovitz noted in the online Jewish publication Tablet:

As soon as news of the ordinance broke yesterday, [new Finance Minister and former TV news anchor Yair] Lapid became the target of wide-spread vitriol, registered everywhere from the press to Tel Aviv’s liquor stores. The latter have no more Arak: throngs of drinkers have stormed the streets and snatched all remaining bottles at the current, low price. Soon, restaurants, too, were dry. With their last few bottles at hand, Israelis then took to the Internet to express their dislike of their minister. “We’re the Arak people, Yair,” wrote one popular blogger, “and we’ll shove your cigar up your butt.” More than 10,000 people liked the post on Facebook.

Arak is sometimes termed a “peasant’s drink” here because it has cost NIS 35 (roughly $8.75) for a 750ml bottle. Higher-quality, imported vodkas, in contrast, can cost at least NIS 80 ($20) in a country where the average salary is the equivalent of $27,000 per year, the poverty rate is the highest in the OECD, and most consumer products are more expensive than in the West. The economic conditions have led to many protests throughout Israel, as in many other Middle Eastern countries, in recent years — and the outcry over the increase in alcohol prices is yet another example. A 500ml glass bottle of Goldstar or Tuborg beer at the supermarket — before Monday’s latest tax increase — currently costs between NIS 8 and 10 ($2 to $2.50).

Specifically, the tax on beer and (only cheap) liquors will rise from NIS 84 to NIS 105 per liter of alcohol contained — and businesses are also not happy. Niv Elis writes in The Jerusalem Post:

Chaim Oz, a vice president at the Federation of Israeli Chambers of Commerce, said businesses would take a big hit from the sudden change. The new pricing would seriously hurt sales, he said. With large orders already placed for the coming months, the sudden change could bury importers and suppliers, he said.

“Some cheap vodkas will go from NIS 40 to NIS 95 [$10 to $24],” a 140% increase in price, Oz told the Post. “Nobody will buy it at that price.”

Alcohol prices, which are further inflated at bars and night clubs, may also affect tourism. One reveler from the UK, in Tel Aviv for gay-pride festivities last week, said he was shocked by the prices of drinks in the city.

“They tried to charge me 85 shekels for a drink at one bar,” he said. “That’s more than twice what I would pay at a fanciest club in London.”

The reason for the new tax is the Israeli government’s budget deficit of NIS 40 billion ($10 billion) — or 4.2 percent of the country’s Gross Domestic Product. The new coalition government, with Lapid now at the helm of the Finance Ministry after his new, centrist party placed second in the January 2013 elections, wants to cut future deficit projections. As a result, Lapid has taken controversial actions including:

  • A 1% increase to 18% in the Value-Added Tax (VAT) on all goods and services
  • Higher payroll taxes
  • Cutting subsidies for schooling and welfare aid to impoverished ultra-Orthodox families
  • Increased taxes specifically on items such as tobacco, cigarettes, beer, and cheap liquor — such as arak

Israel had weathered the 2008 recession and financial crisis well for a variety of reasons that I go into in an essay over at my company’s website including more regulation, stricter lending standards, and a lack of exposure to bad mortgages and other financial instruments that had allegedly been fraudulently deemed as high-quality by ratings agencies. But the reasons for the current deficit — which is large for Israel but not when compared to many other countries — are complex and go back years. For the background, I recommend reading Ha’aretz’s lengthy overview of the issue (in English).

Israel’s Youth-Drinking Problem

jerusalem teenager drinkingIn addition to combating the budget deficit, the government also wants to fight the increasing problem of teen drinking by making it more expensive for them to obtain alcohol:

  • 75% percent of boys and 25% of girls in elementary school drink over the weekend at home, or during the week while celebrating outside the house, according to a Ynet report by Motti Ravid
  • “About a third of teens aged 12-18 report that they got drunk in the last year, which is a terrible figure,” Prime Minister Benjamin Netanyahu told the Cabinet in 2009. “Moreover, about 20% of boys in the sixth grade report having drunk an alcoholic beverage, or that they drink an alcoholic beverage once a week. That is the second largest figure in Europe.”
  • According to the same article, the prime minister said there had been a 15-percent increase in alcohol consumption since 2006

“More young people drink alcohol than use other drugs or smoke tobacco,” Prof. Richard Isralowitz, director of the Ben-Gurion University Regional Alcohol and Drug Abuse Resources Center, says. “Underage drinking is costing Israel millions in financial losses stemming from violent behavior, criminal activity and traffic fatalities that threaten the well-being of Israel and its people.”

“Curbing underage drinking is an uphill battle because alcohol is readily available and age restrictions on purchase are loosely enforced,” he added. “Studies show that youths are very capable of obtaining alcohol and many parents ignore or underestimate both the extent of the problem and their own children’s alcohol consumption habits.”

When I lived in the major southern Tel Aviv suburb of Rishon Lezion some years ago, a group of teenagers would park on the street below my window, drink, and blast loud music into the early hours of the morning every Thursday, Friday, and Saturday night. I had always wanted to go down and ask them to please be quiet and go elsewhere, but it was probably good that I never did:

On Saturday, May 5, a father was stabbed to death when he approached a group of youths, males and females, on the street to stop them from making noise outside of his apartment window. A few hours earlier, a 19-year-old Nazareth woman met a similar fate.  Only a day later, in Rehovot, a 17-year-old died from stab wounds.

In Jerusalem, where I had also lived for three years, it was not uncommon to see packs of drunk teenagers downtown in the nightlife district — encompassing “Cat Square” (also known “Crack Square”) and the neighboring area that has become known as “American Square.” Sadly, such events are increasingly common — and very worrisome to the government because Israel had never developed a “drinking culture” until relatively recently.

Ashkenazi Jews in Israel have always been (somewhat accurately) stereotyped as not being heavy drinkers. (Have you tasted Manischewitz?) Mizrahi Jews in Israel come from Arab countries where alcohol is either banned under Islamic law or drunk in smaller quantities. Among the Israeli adults I know, it is much more common to smoke marijuana than to drink heavily — in fact, most police officers, at least in Tel Aviv, turn blind eyes to public pot smoking unless the person is selling or distributing it.

According to my Israeli friends and my own observations, most heavy drinkers in Israel tend to come from these populations:

  • Students, tourists, and immigrants from heavily-drinking countries such as the United States and England — Israelis have told me that they call an American who drinks a lot a kaki americai (“American shit”)
  • Russians and other eastern Europeans whose families had escaped to Israel after the fall of the Soviet Union in the early 1990s — many of whom are not Jews and some of whom had falsified documents allowing them to come to Israel
  • Ultra-Orthodox Ashkenazi Jews — who had lobbied against a proposed law that would make it illegal for a minor even to hold a bottle of alcohol (the drinking age is eighteen here)
  • Impoverished Mizrahi and Ethiopian Jews — who, for various historical and cultural reasons, tend to have less education and work opportunities in Israel than Ashkenazi Jews

Compared to Israeli youths, Israeli adults have a low rate of alcohol consumption compared to much of the world (this data is compiled from various prior links):

  • Annual per-capita consumption in Israel is roughly about 2 liters of alcohol — compared to the world leader of Russia, where annual per-capita consumption is 40 bottles of vodka (roughly 12 liters of alcohol)
  • The rate of alcoholism in Israel is less than 0.5%
  • Only 2% of car accidents are attributed to driving under the influence

As Seth Freedman once described it in the Guardian:

… while Israeli football fans are renowned for their passionate exuberance when following their teams, barely any members of match-day crowds are drunk in the stadiums, thus avoiding one of the chief impediments to crowd control faced by European countries. Similarly, Israeli clubs and bars are – comparatively – largely devoid of the type of aggression and hostility so prevalent in towns and cities across Britain, where the effects of binge drinking have a devastating effect on what should be an amicable night out for thousands of revellers.

The reasons for the heavy drinking now among Israeli teenagers are complicated and still not well known. I’ll posit these ideas:

  • Stress over their impending mandatory military service after high school at a complex time in the Middle East
  • A permissive attitude among many Israeli parents to let children do what they want since they’ll be in the army soon enough
  • Exposure to American reality television and other culture from Western countries — “Jersey Shore,” for example, has been shown on cable — and a resulting desire to emulate these “cool” Americans
  • Kiosk and makolet owners who will sell anything to anyone of any age in order to make more money in these tough economic times

I invite further thoughts in the comments below.

The Economics of “Sin Taxes”

High taxes on items such as alcohol, cigarettes, and soft drinks are examples of “sin taxes” — efforts by governments to raise revenue and effect societal change by making socially-undesirable products and services more expensive. But are such measures effective? The answer is complicated. The goal is to make these items cost a lot — but not so much more expensive that it leads to black markets and organized crime.

Adam J. Hoffer, William F. Shughart II, and Michael D. Thomas argued in U.S. News & World Report this year that “sin taxes”:

  • Result in money being wasted on lobbying that could be better spent elsewhere
  • Result in poorer people being hurt the most
  • Lead to revenue that is rarely used for its intended purpose

A U.S. National Bureau of Economic Research (NBER) report (website and PDF) on alcohol taxes determined the following:

Only a subgroup responds significantly to price. Importantly, the unresponsive group drinks more heavily, suggesting that a higher price could fail to curb drinking by those most likely to cause negative externalities.

I could not find any relevant Israeli studies, so only time will tell whether the July 1 tax increase on alcohol will help the country’s budget deficit and reduce teenage drinking.

Get Your Israeli Arak While You Can

arak cocktailArak is typically drunk:

  • In a glass with water and ice
  • As a “chaser” (what Israelis call a “shot”)
  • As Katherine Martinelli notes, in various cocktails

While I was out this past weekend, I asked a bartender how much a chaser of arak would cost this coming week. He, and probably many other pub and liquor-store owners, said he still did not know. So, my advise to any readers in Israel is to try the Middle Eastern liquor while you can.

Fast Company reporter Neal Ungerleider once wrote this about arak: “You have never experienced a hangover until you have drank this.” Come Monday, the hangover will probably be worse once you see the price.

Samuel Scott is a former Boston newspaper editor who now lives in Israel and works as Senior Director of Digital Marketing and SEO Team Leader for The Cline Group. You can follow Scott on his personal Facebook, LinkedIn, Google+, and Twitter accounts.

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