From 1961 to 1983, government expenditures grew far more rapidly
than Israel's GNP, primarily because of the sharp increase in
defense outlays from the latter half of the 1960s through the
1970s. Taxation was insufficient to finance the increase in government
spending. Although gross taxes increased, net taxes declined continuously
during the period. To meet the deficit, the government resorted
to domestic and foreign borrowing.
By the mid-1970s, the government increasingly relied on foreign
sources to finance the domestic deficit. These growing debts were
equivalent to almost 14 percent of each year's GNP, during a time
when GNP was growing at less than 2 percent a year.
In the second half of the 1970s, the tax system collected approximately
47 percent of GNP, compared with 35 percent in the 1960s and 41
percent in the first half of the 1970s. This rise occurred mainly
in direct taxes and taxation of domestically produced goods, while
taxes on imports declined by a small margin. During FY 1981, direct
taxes represented 25.7 percent of GNP; they were 14.3 percent
of GNP in FY 1961. Taxes on domestic production represented 12
percent of GNP in FY 1981, a decline from the FY 1961 high of
13.9 percent. The introduction of the value-added tax on both
domestic and foreign goods added a tax base of 8.7 percent of
GNP in FY 1981.
In FY 1986, income taxes collected represented 33 percent of
GNP. Value-added taxes represented 20 percent of GNP and customs
duties represented 4 percent of GNP. In late 1987, the government
announced plans to revamp the tax structure in the light of the
1985 Economic Stabilization Program (see The Economic Stabilization
Program of July 1985 , this ch.).
Data as of December 1988