Prime Minister Binyamin Netanyahu and Finance Minister Moshe Kahlon (Kulanu) announced the reduction of Value Added Tax (VAT; Israel's sales tax.) from 18% to 17% and corporate tax reduction from 26.5% to 25%, citing the need for economic growth.
The cut is an effort to get the country back on a sustainable path of growth after recent signs that the economy has begun sputtering.
The tax reduction is projected to cause the State of Israel to lose some 6.5 billion shekel ($1.6 billion) annually.
A reduction in VAT was made possible due to excess tax collection. In July, the state budget deficit stood at a level of 2.1% of Gross Domestic Product (GDP), while the full year's GDP target was 2.9%. The result: surplus taxes to the tune of 8 billion NIS ($2.1 billion), with some 10 billion NIS ($2.5 billion) predicted to be collected in total by the end of 2015.
Kahlon is ruling out recommendations by senior staff at his ministry that the budget deficit ceiling for this year and next be lowered instead. Kahlon prefers that the deficit ceiling of 3% of the country’s gross domestic product be left in place for this year and next.
The government had initially set a 2.5% deficit for this year and 2% for 2016. Analysts predict that VAT will eventually be raised again, predicting that the total cost of the move will not be able to be replenished entirely by a market upswing.
The Bank of Israel has opposed the decision noting that: "against the background of the uncertainty regarding economic developments next year, reducing the Value Added Tax (VAT) rate by 1 percentage point, which has a cost of NIS 4.8 billion, is liable to lead to a further increase in the deficit next year, and to put at risk the meeting of the deficit target of 2.9 percent (which in itself will lead to an increase in the share of debt in GDP). Furthermore, reducing the VAT rate at this time will weigh on meeting fiscal targets for coming years, and is not in line with a consistent taxation policy and one that is aimed at achieving long-term targets."
