PM Netanyahu joins Finance Minister Kahlon in announcing 1% reduction in VAT, 1.5% decrease in business tax, marking major shift in financial policy.

Prime Minister Benjamin Netanyahu convened a joint press conference with Finance Minister Moshe Kahlon Thursday afternoon, when the two announced that value-added tax (VAT) will be reduced in Israel from 18 percent to 17 percent.

Taxes on companies will also be reduced and the entire package of cuts is expected to cost the government some NIS 6.5 billion annually.

Both Netanyahu and Kahlon hailed the decision as returning money earned from the citizens, to the citizens.

Kahlon and Netanyahu. (Archive photo)
Kahlon and Netanyahu. (Archive photo)


VAT represents a general sales tax on every-day products and goods. Officials have been discussing the possible decrease in taxes in meetings over the last two weeks in wake of signals that Israel’s economy is experiencing a slump, bringing growth to just 0.3 percent, below that of troubled Spain and Greece.

Meanwhile, Israeli businesses will also have their tax payments decreased from 26.5 percent to 25 percent.

The tax reductions are thanks to a smaller state deficit than originally planned for. In July, the state budget deficit stood at 2.1 percent of GDP while the deficit target for the year as a whole was 2.9 percent.

The unexpected 0.8 percent of GDP amounts to some NIS 8 billion. Current estimations put the unplanned-for funds at NIS 10 billion by the end of the year, meaning that even with the new tax cuts, the State will have NIS 3.5 billion than was originally unplanned for.

Reducing taxes is expected to have several positive effects including reduced prices in the market place and more money for consumers to spend and boost Israel’s economic growth.

However, the cuts are due to cost the government billions and government officials are expected to raise taxes again once the full effects of the reduction is felt.

Tax reductions due to an excess in State coffers is considered a controversial move in economic policy which holds that surplus funds are most wisely utilized by reducing the debt to GDP ration of the country and then, during a recession, to allow the ratio to rise in order to dispense with cuts in State budget.

As reported by Ynetnews