Government Spending Relative to GDP Has Shrunk Since 1985, Says Expert

Outlays on local authorities and national institutions much lower than OECD average.

Moti Bassok
Moti Bassok
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Bank of Israel headquarters in Jerusalem.
Bank of Israel headquarters in Jerusalem.Credit: Bloomberg
Moti Bassok
Moti Bassok

The level of government spending in Israel relative to the country’s gross domestic product shrank from 64.5% of GDP in 1985, when the government instituted an economic stabilization plan, to a low of 39.2% in 2012, according to data prepared by Rafi Melnick, the provost of the Interdisciplinary Center in Herzliya who is also a member of the Bank of Israel’s monetary committee. Last year, the rate rose slightly to 39.4%, according to Melnick’s data, which is to be presented to a panel this week on the optimal size of government as part of the IDC’s annual Herzliya conference.

According to Melnick’s data, the scope of government spending at all levels in Israel last year, including local government spending and outlays at national institutions, was much lower than the average among other countries of the Organization for Economic Cooperation and Development, the grouping of the world’s developed economies. At 33% of GDP, South Korea had the lowest level of government expenditure of all kinds in relation to the size of the country’s economy, while the comparable figure in Israel was 41%. The OECD average was 47%. The highest expenditure, as measured by this broadest gauge of government spending, was in Slovenia, where it was nearly 60% of GDP – more than Greece, at 58%, and Finland at 57%.

In 1985, Israeli government revenue from direct taxation (income tax and real-estate tax) represented 21.5% of the country’s gross domestic product, while government revenue from indirect taxes (value added tax and customs duties) was more than 19% of GDP. In 2013, the comparable figures had fallen to 15% for direct tax revenues and 14% for indirect tax receipts, according to Melnick.

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