Economic Sustainability
#26Key Findings
In the category of economic sustainability, Israel performs relatively poorly (rank 26) in international comparison.
There is no circular economy strategy or roadmap. The Ministry of Finance is responsible for coordinating critical infrastructure policy, but no strategic plan has been prepared. Implementation of a carbon tax has been delayed. The OECD has criticized Israel for failing to meet climate standards.
No comprehensive vocational training policy is in place. Most training is performed by private organizations. Current policy does not facilitate worker mobility, and there is no short-term work scheme to handle economic shocks. Labor market participation rates are low among Arab women and ultraorthodox men. Unemployment benefits are comparatively low.
Income taxes are progressive. Both income and corporate tax burdens have fallen in recent years, accompanied by a rise in indirect taxes, especially VAT. Budget policy includes a deficit ceiling and an expenditure rule that limits year-on-year budget growth. The Ministry of Finance also holds hidden budgetary reserves. Government and public bodies provide most R&D funding.
There is no circular economy strategy or roadmap. The Ministry of Finance is responsible for coordinating critical infrastructure policy, but no strategic plan has been prepared. Implementation of a carbon tax has been delayed. The OECD has criticized Israel for failing to meet climate standards.
No comprehensive vocational training policy is in place. Most training is performed by private organizations. Current policy does not facilitate worker mobility, and there is no short-term work scheme to handle economic shocks. Labor market participation rates are low among Arab women and ultraorthodox men. Unemployment benefits are comparatively low.
Income taxes are progressive. Both income and corporate tax burdens have fallen in recent years, accompanied by a rise in indirect taxes, especially VAT. Budget policy includes a deficit ceiling and an expenditure rule that limits year-on-year budget growth. The Ministry of Finance also holds hidden budgetary reserves. Government and public bodies provide most R&D funding.
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Graph View
How committed is the government to driving the transition toward a circular economy?
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The government is clearly committed to transitioning to a circular economy.
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The government is largely committed to transitioning to a circular economy.
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The government is somewhat committed to transitioning to a circular economy.
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1
The government is not at all committed to transitioning to a circular economy.
There is no circular economy strategy or roadmap, and the development of such a roadmap is only in its very early stages within the Ministry of Economy. However, there is a strategic waste disposal plan. The main goal of the plan is to reduce the amount of waste buried from 80% at present to 20% by 2030. The plan has a detailed roadmap and clearly defined goals. The action plans are geographically rather than sector specific, and encompass plans for waste disposal within municipal borders and between municipalities.
The overall plan does not address all aspects in detail and cannot be seen as comprehensive. A more detailed plan was supposed to be developed in 2021; however, this did not take place. The last report by the Ministry of Environmental Protection on the subject was published in March 2022. Most efforts and funding were targeted toward building and improving waste disposal facilities and recycling centers. No progress has been made regarding new regulations. Since the change in government in December 2022, the strategic plan has not been discussed.
There are sporadic projects promoted by the Ministry of Environmental Protection. For instance, the Ministry of Environmental Protection and the Ministry of Economy have a joint project involving industrial partners, which aims to repurpose waste from one factory as material for use in another factory. The ministries help coordinate between the various industrial partners. The project began in 2021 and has resulted in 140 deals being signed so far.
The overall plan does not address all aspects in detail and cannot be seen as comprehensive. A more detailed plan was supposed to be developed in 2021; however, this did not take place. The last report by the Ministry of Environmental Protection on the subject was published in March 2022. Most efforts and funding were targeted toward building and improving waste disposal facilities and recycling centers. No progress has been made regarding new regulations. Since the change in government in December 2022, the strategic plan has not been discussed.
There are sporadic projects promoted by the Ministry of Environmental Protection. For instance, the Ministry of Environmental Protection and the Ministry of Economy have a joint project involving industrial partners, which aims to repurpose waste from one factory as material for use in another factory. The ministries help coordinate between the various industrial partners. The project began in 2021 and has resulted in 140 deals being signed so far.
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How committed is the government to updating and protecting critical infrastructure?
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The government is clearly committed to updating basic technical infrastructure.
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The government is largely committed to updating basic technical infrastructure.
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The government is somewhat committed to updating basic technical infrastructure.
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The government is not at all committed to updating basic technical infrastructure.
In 2023, the government passed legislation that includes a list of critical infrastructure projects by categories, including tunnels, electricity, water, oil and gas, transport, and waste. The Ministry of Finance is responsible for coordinating policy regarding critical infrastructure. According to law, critical infrastructure projects will be prioritized over others. Additionally, the relevant government department will appoint a specific individual responsible for coordinating and managing critical infrastructure projects. Furthermore, various regulatory and other barriers that face regular infrastructure projects can be bypassed in the case of critical infrastructure projects. The schedule for critical infrastructure projects will be published publicly.
According to the Planning and Construction Law, the government must establish a ministerial committee for critical infrastructure. The committee is chaired by the prime minister, and its members include the minister of finance, the minister of the interior, the minister of environmental protection and the relevant minister based on the subject matter handled by the committee. A minister who wishes to promote a national planning program related to critical infrastructure must present the program to the ministerial committee and receive its approval before moving forward.
Because this amendment to the law is new, the committee has not yet issued any decisions. The amendment also requires the National Mapping Center to map all infrastructure projects for prioritization. This mapping exercise took place recently; however, no strategic plan has been prepared. The Ministry of Finance is the administrative organization responsible for planning and coordination, but it has not introduced any strategic plan yet.
In 2020, the state comptroller reported that there were many gaps in the readiness of Israel’s defense system to protect critical infrastructure from missiles, rockets and other air threats. The comptroller noted that, despite the 2011 decision to safeguard critical infrastructure, no action had been taken. Furthermore, the Ministry of Defense, which is the responsible department in this case, has not provided any operative plans (State Comptroller, 2020).
Citations:
State Comptroller. 2020. “Critical Infrastructure.” https://www.mevaker.gov.il/he/Reports/Report_292/0cb33898-55c1-4f7f-a9af-43f5cdc11e9e/part101-izum.docx
According to the Planning and Construction Law, the government must establish a ministerial committee for critical infrastructure. The committee is chaired by the prime minister, and its members include the minister of finance, the minister of the interior, the minister of environmental protection and the relevant minister based on the subject matter handled by the committee. A minister who wishes to promote a national planning program related to critical infrastructure must present the program to the ministerial committee and receive its approval before moving forward.
Because this amendment to the law is new, the committee has not yet issued any decisions. The amendment also requires the National Mapping Center to map all infrastructure projects for prioritization. This mapping exercise took place recently; however, no strategic plan has been prepared. The Ministry of Finance is the administrative organization responsible for planning and coordination, but it has not introduced any strategic plan yet.
In 2020, the state comptroller reported that there were many gaps in the readiness of Israel’s defense system to protect critical infrastructure from missiles, rockets and other air threats. The comptroller noted that, despite the 2011 decision to safeguard critical infrastructure, no action had been taken. Furthermore, the Ministry of Defense, which is the responsible department in this case, has not provided any operative plans (State Comptroller, 2020).
Citations:
State Comptroller. 2020. “Critical Infrastructure.” https://www.mevaker.gov.il/he/Reports/Report_292/0cb33898-55c1-4f7f-a9af-43f5cdc11e9e/part101-izum.docx
Graph View
How committed is the government to fully decarbonizing the energy system by 2050?
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The government is clearly committed to transitioning to a decarbonized energy system.
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The government is largely committed to transitioning to a decarbonized energy system.
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The government is somewhat committed to transitioning to a decarbonized energy system.
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1
The government is not at all committed to transitioning to a decarbonized energy system.
A carbon tax was approved in January 2024, although its implementation has been postponed to 2025 (Ashkenazi 2024). The new carbon tax will include government subsidies to industry, but lacks specific requirements for improved energy efficiency in factories. Alongside the adoption of the carbon tax, the government increased subsidies for natural gas supply, which the Ministry of Environmental Protection opposed. The government also approved subsidies for enhancing energy efficiency, although it has been argued that these are under-budgeted. This reflects the government’s general reliance on market regulation rather than significant public investment.
The prevailing taxation on fossil fuels mainly pertains to gas for cars and industry. The existing policy does not compensate for the full costs and externalities of using carbon, as found in a policy paper prepared by the Ministry of Environmental Protection in 2021.
In 2021, the Ministry of Environmental Protection, along with the ministries of economy, energy and Transportation, and the OECD, began a strategic process to develop a roadmap for decreasing carbon use by 2050. The programs are broken down by sector: energy, transportation, construction, industry and waste. Each sector includes a detailed plan with specific measures and goals (Ministry of Environmental Protection, 2021).
In addition, the Ministry of Environmental Protection has proposed the Climate Law to address carbon and energy-related issues; however, the law has not yet passed. The OECD stated in May 2023 that Israel was failing to meet all the climate standards set by the organization.
Citations:
Ashkenazi, S. 2024. “A Moderate Increase in the Price of Electricity, a Low Budget for Energy Efficiency: A New Carbon Tax Was Approved” (Hebrew). Calcalist, January 15. https://www.calcalist.co.il/local_news/article/hyq2ux7k6
Ministry of Environmental Protection. 2021. “Pricing of carbon in Israel.” https://www.idi.org.il/media/17224/carbon_pricing_in_israel.pdf
The prevailing taxation on fossil fuels mainly pertains to gas for cars and industry. The existing policy does not compensate for the full costs and externalities of using carbon, as found in a policy paper prepared by the Ministry of Environmental Protection in 2021.
In 2021, the Ministry of Environmental Protection, along with the ministries of economy, energy and Transportation, and the OECD, began a strategic process to develop a roadmap for decreasing carbon use by 2050. The programs are broken down by sector: energy, transportation, construction, industry and waste. Each sector includes a detailed plan with specific measures and goals (Ministry of Environmental Protection, 2021).
In addition, the Ministry of Environmental Protection has proposed the Climate Law to address carbon and energy-related issues; however, the law has not yet passed. The OECD stated in May 2023 that Israel was failing to meet all the climate standards set by the organization.
Citations:
Ashkenazi, S. 2024. “A Moderate Increase in the Price of Electricity, a Low Budget for Energy Efficiency: A New Carbon Tax Was Approved” (Hebrew). Calcalist, January 15. https://www.calcalist.co.il/local_news/article/hyq2ux7k6
Ministry of Environmental Protection. 2021. “Pricing of carbon in Israel.” https://www.idi.org.il/media/17224/carbon_pricing_in_israel.pdf
Graph View
To what extent do existing labor market institutions support or hinder the transition to an adaptive labor market?
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Labor market institutions are fully aligned with the goal of an adaptable labor market.
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Labor market institutions are largely aligned with the goal of an adaptable labor market.
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Labor market institutions are only somewhat aligned with the goal of an adaptable labor market.
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Labor market institutions are not at all aligned with the goal of an adaptable labor market.
The main body responsible for vocational training is the Ministry of Labor. One of the ministry’s official goals is to provide training for people over the age of 18 to reduce socioeconomic inequalities and improve productivity. Until recently, the budget for and scope of vocational training, which had always low by international standards, was declining over time. However, following the COVID-19 pandemic, it has increased significantly (Adva 2024). Nevertheless, over the years, vocational training has become a policy targeted at the lower classes rather than a tool to develop human capital.
Employees are not expected or encouraged to develop their skills during their careers. This is problematic due to the growing shortage of industrial workers in general and high-tech workers in particular. In addition to the Ministry of Labor, other ministries promoting vocational training include the Ministry of Education and the Ministry of Defense, which provides much of the practical training for prospective tech sector workers.
There is no comprehensive policy with specific roadmaps and goals for different sectors, resulting in loose coordination among organizations (State Comptroller 2021). Moreover, no single coordinating body is responsible for overseeing vocational training and ensuring it meets its goals. Most training is conducted by private organizations and, until recently, no entity matched existing training programs to industry needs. Many training programs are financed by vouchers provided to trainees. Furthermore, there is little oversight of the types of training these vouchers support and their usefulness for the economy or individuals. The main stakeholders are not involved in the vocational training process (State Comptroller 2021).
The existing situation does not facilitate mobility nor does it provide tools for employees to handle economic shocks. This was evident during the COVID-19 crisis. The vocational training policy also does not facilitate worker mobilization.
There are no short-time work schemes to mitigate economic shocks. During the COVID-19 pandemic and the current war with Hamas, the government allowed employers to furlough employees, who were then able to claim unemployment benefits (Debowy et al. 2022). As a result, it appears that more working hours were lost and more employees were detached from their current workplaces.
Citations:
Adva Center. 2024. “Government investment in professional training (Hebrew).” https://adva.org/he/vocational-training-budget/
Debowy, M., Epstein, G., and Weiss, A. 2022. “The Israeli Labor Market in the Wake of Covid-19: An Overview.” In State of the Nation Report: Society, Economy and Policy 2021, eds. Taub Center.
Regev, Eitan, Yarden Keidar, and Naor Porat. 2020. Vocational Training in Israel. Jerusalem: The Israeli Democracy Institute. https://www.idi.org.il/media/14752/vocational-training-in-israel-barriers-shortcomings-and-challenges-in-an-international-comparison.pdf
State Comptroller. 2021. “Lifelong Learning and Professional Training for Adults – Adapting to the Changing Labor Market.” https://www.mevaker.gov.il/sites/DigitalLibrary/Documents/2021/71B/2021-71b-105-Labor-Market-Adults.pdf
Employees are not expected or encouraged to develop their skills during their careers. This is problematic due to the growing shortage of industrial workers in general and high-tech workers in particular. In addition to the Ministry of Labor, other ministries promoting vocational training include the Ministry of Education and the Ministry of Defense, which provides much of the practical training for prospective tech sector workers.
There is no comprehensive policy with specific roadmaps and goals for different sectors, resulting in loose coordination among organizations (State Comptroller 2021). Moreover, no single coordinating body is responsible for overseeing vocational training and ensuring it meets its goals. Most training is conducted by private organizations and, until recently, no entity matched existing training programs to industry needs. Many training programs are financed by vouchers provided to trainees. Furthermore, there is little oversight of the types of training these vouchers support and their usefulness for the economy or individuals. The main stakeholders are not involved in the vocational training process (State Comptroller 2021).
The existing situation does not facilitate mobility nor does it provide tools for employees to handle economic shocks. This was evident during the COVID-19 crisis. The vocational training policy also does not facilitate worker mobilization.
There are no short-time work schemes to mitigate economic shocks. During the COVID-19 pandemic and the current war with Hamas, the government allowed employers to furlough employees, who were then able to claim unemployment benefits (Debowy et al. 2022). As a result, it appears that more working hours were lost and more employees were detached from their current workplaces.
Citations:
Adva Center. 2024. “Government investment in professional training (Hebrew).” https://adva.org/he/vocational-training-budget/
Debowy, M., Epstein, G., and Weiss, A. 2022. “The Israeli Labor Market in the Wake of Covid-19: An Overview.” In State of the Nation Report: Society, Economy and Policy 2021, eds. Taub Center.
Regev, Eitan, Yarden Keidar, and Naor Porat. 2020. Vocational Training in Israel. Jerusalem: The Israeli Democracy Institute. https://www.idi.org.il/media/14752/vocational-training-in-israel-barriers-shortcomings-and-challenges-in-an-international-comparison.pdf
State Comptroller. 2021. “Lifelong Learning and Professional Training for Adults – Adapting to the Changing Labor Market.” https://www.mevaker.gov.il/sites/DigitalLibrary/Documents/2021/71B/2021-71b-105-Labor-Market-Adults.pdf
To what extent do existing labor market institutions support or hinder the transition to an inclusive labor market?
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Labor market institutions are fully aligned with the goal of an inclusive labor market.
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Labor market institutions are largely aligned with the goal of an inclusive labor market.
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Labor market institutions are only somewhat aligned with the goal of an inclusive labor market.
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1
Labor market institutions are not at all aligned with the goal of an inclusive labor market.
Israel’s earned income tax credit program aims to encourage unemployed individuals to participate in the labor market. The program provides benefits to low-paid employees who participate more in the labor market. The National Insurance Institution and the Bank of Israel (the central bank) monitor the utilization of the program and its effects on labor market participation. Over the years, the process for receiving income tax credits has been improved and the benefits received have increased, enhancing the program’s effectiveness.
Labor market participation is particularly low among Arab women and ultraorthodox men. For Arab women, various programs, including vocational training, are promoted by non-governmental and governmental agencies. Although the employment rate of Arab women increased to 41% in 2023, it remains low compared to Jewish women. The current programs are insufficient to address gaps in human capital and do not tackle infrastructural barriers, such as the need in Arab villages for effective public transport (Knesset Research Center, 2023).
The government implements various programs, including vocational training, to increase the employment rate of ultraorthodox men. However, despite significant investment in this area, progress remains limited. One of the main reasons for this lack of progress is that ultraorthodox men can avoid being drafted into the army if they remain in the Yeshiva until age 26. This policy disincentives ultraorthodox men from participating in the labor market. Moreover, the government does not mandate the teaching of basic skills, such as mathematics and English, in ultraorthodox schools for boys. Consequently, students in the ultraorthodox school system often lack essential workplace skills (Knesset Research Center, 2022).
Women working in the civil service are eligible to work one hour less if they have children under age five and are employed full time.
In addition, following the COVID-19 pandemic, the civil service issued a directive that allows employees to work remotely several times a week and complete extra hours remotely. While this directive should improve work-life balance, it applies only to workers directly employed by governmental bodies, as a result its effect is limited.
Citations:
Knesset Research Center. 2023. “Information on the implementation of programs to promote the employment of Arab women.” https://fs.knesset.gov.il/globaldocs/MMM/cb8b7263-3a99-ec11-8148-00155d082403/2_cb8b7263-3a99-ec11-8148-00155d082403_11_20137.pdf
Knesset Research Center. 2022. “Employment of Ultraorthodox Men.” https://fs.knesset.gov.il/globaldocs/MMM/08a5e3e2-3cd1-ec11-8147-005056aac6c3/2_08a5e3e2-3cd1-ec11-8147-005056aac6c3_11_19536.pdf
Labor market participation is particularly low among Arab women and ultraorthodox men. For Arab women, various programs, including vocational training, are promoted by non-governmental and governmental agencies. Although the employment rate of Arab women increased to 41% in 2023, it remains low compared to Jewish women. The current programs are insufficient to address gaps in human capital and do not tackle infrastructural barriers, such as the need in Arab villages for effective public transport (Knesset Research Center, 2023).
The government implements various programs, including vocational training, to increase the employment rate of ultraorthodox men. However, despite significant investment in this area, progress remains limited. One of the main reasons for this lack of progress is that ultraorthodox men can avoid being drafted into the army if they remain in the Yeshiva until age 26. This policy disincentives ultraorthodox men from participating in the labor market. Moreover, the government does not mandate the teaching of basic skills, such as mathematics and English, in ultraorthodox schools for boys. Consequently, students in the ultraorthodox school system often lack essential workplace skills (Knesset Research Center, 2022).
Women working in the civil service are eligible to work one hour less if they have children under age five and are employed full time.
In addition, following the COVID-19 pandemic, the civil service issued a directive that allows employees to work remotely several times a week and complete extra hours remotely. While this directive should improve work-life balance, it applies only to workers directly employed by governmental bodies, as a result its effect is limited.
Citations:
Knesset Research Center. 2023. “Information on the implementation of programs to promote the employment of Arab women.” https://fs.knesset.gov.il/globaldocs/MMM/cb8b7263-3a99-ec11-8148-00155d082403/2_cb8b7263-3a99-ec11-8148-00155d082403_11_20137.pdf
Knesset Research Center. 2022. “Employment of Ultraorthodox Men.” https://fs.knesset.gov.il/globaldocs/MMM/08a5e3e2-3cd1-ec11-8147-005056aac6c3/2_08a5e3e2-3cd1-ec11-8147-005056aac6c3_11_19536.pdf
To what extent do existing labor market institutions support or hinder the mitigation of labor market risks?
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Labor market institutions are fully aligned with the goal of protecting individuals against labor market risks.
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Labor market institutions are largely aligned with the goal of protecting individuals against labor market risks.
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3
Labor market institutions are only somewhat aligned with the goal of protecting individuals against labor market risks.
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1
1
Labor market institutions are not at all aligned with the goal of protecting individuals against labor market risks.
There are various protections against labor market risks, but these are generally limited in scope.
Unemployment benefits are comparatively low in both replacement rate and duration, partly due to a lack of funding following reductions in employers’ payments (Koreh 2020). Employees are eligible for unemployment benefits if they have worked for at least 12 out of the last 18 months.
Self-employed workers are not eligible for unemployment benefits. Various attempts to change this situation over the years have failed. Self-employed workers are also not eligible for other benefits such as paid leave, sick days or vacation.
In Israel, a mandatory pension law has been in place since 2018, requiring 18.5% of the value of an employee’s salary to be paid into a pension fund. Employees contribute 6% of their salary, while the employer covers the rest. Self-employed workers are also subject to this requirement. This mandatory pension system reflects a privatized scheme, ensuring that all employees have privately managed pension funds (Lurie 2018).
All government employees (including civil servants and local authority workers) are represented by the central labor union. However, this does not include workers in outsourced public services, who are usually not organized and enjoy only basic mandatory work benefits (Paz-Fuchs 2018). In addition, unionization of private sector employees has been increasing in recent years, particularly among workers of high-tech and service provision companies. In 2022, 30% of employees in Israel were members of a labor union (Kolerman 2022).
Citations:
Koreh, Michal. 2019. “The Deficit Crisis in the National Insurance Budget Towards the Year 2027 - Description of the Causes, Analysis of the Consequences and Proposed Solutions.” Social Security 108.
Kolerman, Matan. 2022. “The Effect of Labor Unions on Inequality, Employment and Wages.” Arlozorov Forum. https://www.arlozforum.org/post
Lurie, L. 2018. “Pension Privatization in Israel.” In A. Paz-Fuchs, R. Mandelkern, and I. Galnoor, eds., The Privatization of Israel: The Withdrawal of State Responsibility, 101–121. Palgrave Macmillan. https://www.palgrave.com/gp/book/9781137601568#otherversion=9781137582614
Paz-Fuchs, A. 2018. “Privatization, Outsourcing, and Employment Relations in Israel.” In A. Paz-Fuchs, R. Mandelkern, and I. Galnoor, eds., The Privatization of Israel: The Withdrawal of State Responsibility, 283-309. New York: Palgrave Macmillan US. https://doi.org/10.1057/978-1-137-58261-4_12
Unemployment benefits are comparatively low in both replacement rate and duration, partly due to a lack of funding following reductions in employers’ payments (Koreh 2020). Employees are eligible for unemployment benefits if they have worked for at least 12 out of the last 18 months.
Self-employed workers are not eligible for unemployment benefits. Various attempts to change this situation over the years have failed. Self-employed workers are also not eligible for other benefits such as paid leave, sick days or vacation.
In Israel, a mandatory pension law has been in place since 2018, requiring 18.5% of the value of an employee’s salary to be paid into a pension fund. Employees contribute 6% of their salary, while the employer covers the rest. Self-employed workers are also subject to this requirement. This mandatory pension system reflects a privatized scheme, ensuring that all employees have privately managed pension funds (Lurie 2018).
All government employees (including civil servants and local authority workers) are represented by the central labor union. However, this does not include workers in outsourced public services, who are usually not organized and enjoy only basic mandatory work benefits (Paz-Fuchs 2018). In addition, unionization of private sector employees has been increasing in recent years, particularly among workers of high-tech and service provision companies. In 2022, 30% of employees in Israel were members of a labor union (Kolerman 2022).
Citations:
Koreh, Michal. 2019. “The Deficit Crisis in the National Insurance Budget Towards the Year 2027 - Description of the Causes, Analysis of the Consequences and Proposed Solutions.” Social Security 108.
Kolerman, Matan. 2022. “The Effect of Labor Unions on Inequality, Employment and Wages.” Arlozorov Forum. https://www.arlozforum.org/post
Lurie, L. 2018. “Pension Privatization in Israel.” In A. Paz-Fuchs, R. Mandelkern, and I. Galnoor, eds., The Privatization of Israel: The Withdrawal of State Responsibility, 101–121. Palgrave Macmillan. https://www.palgrave.com/gp/book/9781137601568#otherversion=9781137582614
Paz-Fuchs, A. 2018. “Privatization, Outsourcing, and Employment Relations in Israel.” In A. Paz-Fuchs, R. Mandelkern, and I. Galnoor, eds., The Privatization of Israel: The Withdrawal of State Responsibility, 283-309. New York: Palgrave Macmillan US. https://doi.org/10.1057/978-1-137-58261-4_12
Graph View
To what extent do existing tax institutions and procedures support or hinder adequate tax revenue flows?
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The tax system is fully aligned with the goals of ensuring adequate tax revenues.
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The tax system is largely aligned with the goals of ensuring adequate tax revenues.
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The tax system is only somewhat aligned with the goals of ensuring adequate tax revenues.
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The tax system is not at all aligned with the goals of ensuring adequate tax revenues.
Tax policy includes tax exemptions for individuals and companies to encourage investment and labor market participation. For individuals, there are tax exemptions for women, Israeli citizens, parents with small children and university graduates. Employees do not need to file an annual tax report to receive an exemption.
There are also exemptions for companies, especially high-tech firms, and those operating in peripheral regions, to encourage investment in Israel, particularly in areas where there is a shortage of jobs.
The administrative capacity to collect taxes is generally sufficient. However, over the past two years, a personnel shortage in the Tax Authority has made it more challenging for the agency to meet its goals. In Israel, only self-employed workers are required to file an annual tax report, which makes it difficult for the authority to identify tax evasion. To address this, the Tax Authority has launched a platform for receiving anonymous reports on tax evasion and conducts investigations to uncover such cases. Nevertheless, these efforts do not cover the entire scope of tax evasion.
The current war with Hamas has dramatically increased public spending on military and social needs. However, it is still unclear how the government will increase revenues following the war.
There are also exemptions for companies, especially high-tech firms, and those operating in peripheral regions, to encourage investment in Israel, particularly in areas where there is a shortage of jobs.
The administrative capacity to collect taxes is generally sufficient. However, over the past two years, a personnel shortage in the Tax Authority has made it more challenging for the agency to meet its goals. In Israel, only self-employed workers are required to file an annual tax report, which makes it difficult for the authority to identify tax evasion. To address this, the Tax Authority has launched a platform for receiving anonymous reports on tax evasion and conducts investigations to uncover such cases. Nevertheless, these efforts do not cover the entire scope of tax evasion.
The current war with Hamas has dramatically increased public spending on military and social needs. However, it is still unclear how the government will increase revenues following the war.
To what extent do existing tax institutions and procedures consider equity aspects?
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The tax system is fully aligned with the goal of ensuring equity.
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The tax system is largely aligned with the goal of ensuring equity.
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The tax system is only somewhat aligned with the goal of ensuring equity.
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1
The tax system is not at all aligned with the goal of ensuring equity.
Income tax in Israel is progressive, though the exemptions described in the previous section tend to reduce its progressiveness, as exemptions mainly apply to high earners. Over the years, there has been a steady decrease in the income and corporate tax burden, accompanied by a rise in indirect taxes (especially VAT), which are regressive. The VAT in Israel is quite high at 17% and is set to increase to 18% in 2025 due to the costs of war. The VAT is consistent across services and areas, except for fruits and vegetables, which are completely exempt. There is no inheritance tax in Israel, but there is a tax on capital that contributes very little to government revenue.
Each year, the government designates several areas of the country (mostly peripheral regions) as eligible for tax exemptions, which individuals can deduct from their overall tax liabilities, including labor and capital. Corporate taxes also include various exemptions for companies located in peripheral areas to encourage investment in these regions.
In addition, there is no VAT in Eilat, a touristic city in the south of Israel.
Each year, the government designates several areas of the country (mostly peripheral regions) as eligible for tax exemptions, which individuals can deduct from their overall tax liabilities, including labor and capital. Corporate taxes also include various exemptions for companies located in peripheral areas to encourage investment in these regions.
In addition, there is no VAT in Eilat, a touristic city in the south of Israel.
To what extent do existing tax institutions and procedures minimize compliance and collection costs?
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The tax system is fully aligned with the goal of minimizing compliance and collection costs.
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The tax system is largely aligned with the goal of minimizing compliance and collection costs.
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The tax system is only somewhat aligned with the goal of minimizing compliance and collection costs.
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1
1
The tax system is not at all aligned with the goal of minimizing compliance and collection costs.
Israeli employees do not have to file a tax report, which increases compliance and reduces administrative costs. Employers report their income annually. An employee working for more than one employer has to file a request for tax coordination. In recent years, this request can be filed online via the tax authority website. Individuals receive the necessary form electronically and immediately, which further increases compliance.
Self-employed individuals must submit an annual tax report. To do so, many use accountancy services. In general, tax regulations are accessible and well explained on the tax authority website, and the tax authority has branches in many localities.
Lastly, each Israeli citizen can access their personal files from and track the progress of various requests with the tax authority.
Self-employed individuals must submit an annual tax report. To do so, many use accountancy services. In general, tax regulations are accessible and well explained on the tax authority website, and the tax authority has branches in many localities.
Lastly, each Israeli citizen can access their personal files from and track the progress of various requests with the tax authority.
To what extent do existing tax institutions and procedures internalize negative and positive externalities?
10
9
9
The tax system is fully aligned with the goal of internalizing externalities.
8
7
6
7
6
The tax system is largely aligned with the goal of internalizing externalities.
5
4
3
4
3
The tax system is only somewhat aligned with the goal of internalizing externalities.
2
1
1
The tax system is not at all aligned with the goal of internalizing externalities.
Several measures are used to internalize externalities. There is a special tax on gasoline for cars and on the purchase of cars. Additionally, there is a special tax on tobacco products, including electronic cigarettes. The previous government promoted a tax on road usage during rush hours, although this initiative was dropping following the elections. The previous government also added a tax on plastic tableware and cutlery. However, the current government has removed this tax.
The government provides tax deductions for projects defined by the Authority for Innovation as research and development. Additionally, recognized research and development companies are entitled to other deductions and benefits.
The government provides tax deductions for projects defined by the Authority for Innovation as research and development. Additionally, recognized research and development companies are entitled to other deductions and benefits.
Graph View
To what extent do existing budgetary institutions and procedures support or hinder sustainable budgeting?
10
9
9
Budgetary institutions and policies are fully aligned with the goals of sustainable budgeting.
8
7
6
7
6
Budgetary institutions and policies are largely aligned with the goals of sustainable budgeting.
5
4
3
4
3
Budgetary institutions and policies are only somewhat aligned with the goals of sustainable budgeting.
2
1
1
Budgetary institutions and policies are not at all aligned with the goals of sustainable budgeting.
Israel’s budgetary policy operates under two main fiscal rules: a deficit ceiling and an expenditure rule that limits year-on-year budget growth. Additionally, a mechanism records all future expenditures based on cabinet decisions and legislation. Consequently, even if certain ministries increase their funding, the government often balances the budget through flat rate cuts across all departments or targeted cuts to specific projects.
During crises, these rules can be marginalized. For example, during the COVID-19 pandemic, the government allocated additional funds for various health and economic needs regardless of the fiscal rules. Nevertheless, while Israel has the fiscal capacity to increase spending during crises, the Ministry of Finance is commonly reluctant to do so.
Each ministry has budgetary reserves. In addition, national reserves are maintained for periods of crisis. The use of these reserves is solely at the discretion of the Ministry of Finance. Moreover, as noted in various reports by the state comptroller, the Ministry of Finance also holds hidden budgetary reserves. These reserves are intended not only for crises but also to counter possible political pressures to increase spending. An example of a hidden reserve involves allocating significantly more funds than needed to a line item for salaries or other rigid expenditures.
There is no prioritization of public investment in existing budget rules. Additionally, there is no long-term planning or evaluation of budget impact. The fiscal rules primarily aim to limit public spending rather than differentiate between regular expenditures and long-term investments (Strawczynski, 2023).
The budgetary process lacks transparency. The Ministry of Finance prepares the budget through the Budget Department, which drafts budget documents and presents them to the ministries. These documents, which detail the necessary budget adjustments, are not available to the public. Following negotiations, each ministry signs a budget agreement with the Ministry of Finance. These agreements also lack transparency. Recently, a petition was filed in court to make these agreements publicly accessible. Moreover, the budget agreements include both the changes introduced to the Knesset and additional changes that will occur during the fiscal year. Because of this lack of transparency, the Knesset remains unaware of the additional promised sums and therefore approves an incomplete budget.
Any budgetary changes made during the budget implementation stage are transparent. All budget transfers are published before being approved by the Knesset’s Finance Committee. In addition, all budget figures are publicly available after the budget is approved.
Specific budgets do not include target lines; however, budget figures are accompanied by a more general economic overview from the Ministry of Finance, where goals are mentioned. Additionally, each ministry includes budget objectives, which are part of the budget documents submitted to the Knesset and publicly accessible.
Citations:
Strawczynski, M. 2023. “Searching for Optimal Fiscal Rules: The Case of Israel.” SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4512059
During crises, these rules can be marginalized. For example, during the COVID-19 pandemic, the government allocated additional funds for various health and economic needs regardless of the fiscal rules. Nevertheless, while Israel has the fiscal capacity to increase spending during crises, the Ministry of Finance is commonly reluctant to do so.
Each ministry has budgetary reserves. In addition, national reserves are maintained for periods of crisis. The use of these reserves is solely at the discretion of the Ministry of Finance. Moreover, as noted in various reports by the state comptroller, the Ministry of Finance also holds hidden budgetary reserves. These reserves are intended not only for crises but also to counter possible political pressures to increase spending. An example of a hidden reserve involves allocating significantly more funds than needed to a line item for salaries or other rigid expenditures.
There is no prioritization of public investment in existing budget rules. Additionally, there is no long-term planning or evaluation of budget impact. The fiscal rules primarily aim to limit public spending rather than differentiate between regular expenditures and long-term investments (Strawczynski, 2023).
The budgetary process lacks transparency. The Ministry of Finance prepares the budget through the Budget Department, which drafts budget documents and presents them to the ministries. These documents, which detail the necessary budget adjustments, are not available to the public. Following negotiations, each ministry signs a budget agreement with the Ministry of Finance. These agreements also lack transparency. Recently, a petition was filed in court to make these agreements publicly accessible. Moreover, the budget agreements include both the changes introduced to the Knesset and additional changes that will occur during the fiscal year. Because of this lack of transparency, the Knesset remains unaware of the additional promised sums and therefore approves an incomplete budget.
Any budgetary changes made during the budget implementation stage are transparent. All budget transfers are published before being approved by the Knesset’s Finance Committee. In addition, all budget figures are publicly available after the budget is approved.
Specific budgets do not include target lines; however, budget figures are accompanied by a more general economic overview from the Ministry of Finance, where goals are mentioned. Additionally, each ministry includes budget objectives, which are part of the budget documents submitted to the Knesset and publicly accessible.
Citations:
Strawczynski, M. 2023. “Searching for Optimal Fiscal Rules: The Case of Israel.” SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4512059
Graph View
How committed is the government to utilizing research and innovation as drivers for the transition to a sustainable economy and society?
10
9
9
The government is clearly committed to utilizing research and innovation as drivers for the transition to a sustainable economy and society.
8
7
6
7
6
The government is largely committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
5
4
3
4
3
The government is somewhat committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
2
1
1
The government is not at all committed to utilizing research and innovation as drivers for the transition toward a sustainable economy and society.
In general, Israel’s research and development (R&D) sector is based on three pillars: scientific research, primarily conducted in academia at seven universities; research performed in government and public research institutes; and research carried out by civil-industrial partnerships. Government and public bodies are the primary sources of R&D funding, providing financial support for well over half of Israel’s R&D activities. The major share of these funds for civil R&D purposes is allocated for economic development, mainly in the industrial and agricultural sectors (Israel Ministry of Foreign Affairs, Science, n.d).
The Israel Innovation Authority is the leading government agency responsible for national innovation efforts. This includes enhancing startups and the high-tech industry as a whole. The authority has several units that focus on startups, growth, international efforts and infrastructure. It provides grants and consults with various companies.
The authority’s focus includes climate and sustainability issues. According to its recent report, USD 0.14 in every U.S. dollar invested in Israeli high-tech are directed toward climate-related ventures. Between 2022 and 2023, there was a 13% increase in Israeli companies developing various technological solutions to address climate challenges (an increase of 90 companies).
In 2022, the government adopted the 1685 decision, “encouraging Israeli innovation and promoting collaboration with the high-tech industry to address the issue of climate change.” The decision includes various activities to encourage the tech sector to invest more in developing solutions for climate change and increase the use of renewable energy. However, the decision did not increase the budget for the Ministry of Science nor the Innovation Authority, and explicitly stated that any additional funding will come from the ministry’s existing resources. Thus, while the decision was an important step in promoting innovation and research on climate change, the resources provided were insufficient.
The government does not periodically monitor these activities.
Citations:
Israel Innovation Authority and PLANETech. 2023. “Israel’s State of Climate Tech 2023.” https://innovationisrael.org.il/en/digital-reports/
Israel Ministry of Foreign Affairs. n.d. “Science, Science, and Technology: Research and Development.” https://mfa.gov.il/mfa/aboutisrael/science/pages/science%20and%20technology-%20research%20and%20development.aspx
Israel Innovation Authority. 2023. “The state of hi-tech 2023.” https://innovationisrael.org.il/en/digital-reports
The Israel Innovation Authority is the leading government agency responsible for national innovation efforts. This includes enhancing startups and the high-tech industry as a whole. The authority has several units that focus on startups, growth, international efforts and infrastructure. It provides grants and consults with various companies.
The authority’s focus includes climate and sustainability issues. According to its recent report, USD 0.14 in every U.S. dollar invested in Israeli high-tech are directed toward climate-related ventures. Between 2022 and 2023, there was a 13% increase in Israeli companies developing various technological solutions to address climate challenges (an increase of 90 companies).
In 2022, the government adopted the 1685 decision, “encouraging Israeli innovation and promoting collaboration with the high-tech industry to address the issue of climate change.” The decision includes various activities to encourage the tech sector to invest more in developing solutions for climate change and increase the use of renewable energy. However, the decision did not increase the budget for the Ministry of Science nor the Innovation Authority, and explicitly stated that any additional funding will come from the ministry’s existing resources. Thus, while the decision was an important step in promoting innovation and research on climate change, the resources provided were insufficient.
The government does not periodically monitor these activities.
Citations:
Israel Innovation Authority and PLANETech. 2023. “Israel’s State of Climate Tech 2023.” https://innovationisrael.org.il/en/digital-reports/
Israel Ministry of Foreign Affairs. n.d. “Science, Science, and Technology: Research and Development.” https://mfa.gov.il/mfa/aboutisrael/science/pages/science%20and%20technology-%20research%20and%20development.aspx
Israel Innovation Authority. 2023. “The state of hi-tech 2023.” https://innovationisrael.org.il/en/digital-reports
Graph View
How committed and credible is the government in its activities to guide the effective regulation and supervision of the international financial architecture?
10
9
9
The government is clearly committed to ensuring the stability of the global financial system.
8
7
6
7
6
The government is largely committed to ensuring the stability of the global financial system.
5
4
3
4
3
The government is somewhat committed to ensuring the stability of the global financial system.
2
1
1
The government is not at all committed to ensuring the stability of the global financial system.
The financial system in Israel is regulated by two main bodies: the Banking Supervision Division within the Bank of Israel, which supervises Israeli banks, and the Capital and Insurance Supervision Authority at the Ministry of Finance, which supervises insurance companies and institutional investors. A third body, the Israel Securities Authority, supervises the stock exchange. Coordination between these bodies is limited, and a committee formed to define the exact division of labor and cooperation between the financial regulators has not yet completed its work (State Comptroller 2024).
The financial regulators have adopted the Basel III regulations and the Banking Supervision division within the Bank of Israel conducts regular stress tests. Conversely, the state comptroller (2024) recently found that the resources of the Capital and Insurance Supervision Authority, which is part of the Ministry of Finance, are relatively low compared to similar agencies in other countries and that its risk assessment apparatus has not been functioning well in recent years.
The main goal of the financial regulators in recent years has been to expand competition within a system that was previously very uncompetitive and conservative. (This was one of the reasons cited by the Bank of Israel for the relatively mild effects of the 2008 financial crisis in Israel). In practice, the increased competition has so far mainly benefited big businesses, given reduced credit costs, rather than households and SMEs (Flaiszhaker 2022). One of the steps taken in this direction has been the formation of a credit rating database for individuals. However, it is still unclear whether this step has increased competition for households and lowered their credit costs.
Israel has not been proactive in eliminating tax havens. Moreover, in 2010, it passed a law that provides a 10-year tax exemption for Jewish immigrants and returning Israeli residents, which effectively made Israel a tax haven. On the other hand, Israel participates in the OECD’s international treaty to prevent corruption and combat money laundering through the Authority of Prohibition of Money Laundering, and has been a member of the Financial Action Task Force (FATF) since 2018. The FATF has recognized Israel as a leading country in tackling money laundering.
Citations:
Flaiszhaker, D. 2022. “Financial and Monetary Regulation in Israel Law and Market Inequalities.” Tel Aviv University Law Review 45 (2): [i]-664.
State Comptroller. 2024. “The Supervision of the Capital Market Authority on the Institutional Bodies that Manage Long-Term Savings” (Hebrew). https://www.mevaker.gov.il/sites/DigitalLibrary/Documents/2024/The-cost-of-living/2024-The-cost-of-living-104-Hon.pdf
The financial regulators have adopted the Basel III regulations and the Banking Supervision division within the Bank of Israel conducts regular stress tests. Conversely, the state comptroller (2024) recently found that the resources of the Capital and Insurance Supervision Authority, which is part of the Ministry of Finance, are relatively low compared to similar agencies in other countries and that its risk assessment apparatus has not been functioning well in recent years.
The main goal of the financial regulators in recent years has been to expand competition within a system that was previously very uncompetitive and conservative. (This was one of the reasons cited by the Bank of Israel for the relatively mild effects of the 2008 financial crisis in Israel). In practice, the increased competition has so far mainly benefited big businesses, given reduced credit costs, rather than households and SMEs (Flaiszhaker 2022). One of the steps taken in this direction has been the formation of a credit rating database for individuals. However, it is still unclear whether this step has increased competition for households and lowered their credit costs.
Israel has not been proactive in eliminating tax havens. Moreover, in 2010, it passed a law that provides a 10-year tax exemption for Jewish immigrants and returning Israeli residents, which effectively made Israel a tax haven. On the other hand, Israel participates in the OECD’s international treaty to prevent corruption and combat money laundering through the Authority of Prohibition of Money Laundering, and has been a member of the Financial Action Task Force (FATF) since 2018. The FATF has recognized Israel as a leading country in tackling money laundering.
Citations:
Flaiszhaker, D. 2022. “Financial and Monetary Regulation in Israel Law and Market Inequalities.” Tel Aviv University Law Review 45 (2): [i]-664.
State Comptroller. 2024. “The Supervision of the Capital Market Authority on the Institutional Bodies that Manage Long-Term Savings” (Hebrew). https://www.mevaker.gov.il/sites/DigitalLibrary/Documents/2024/The-cost-of-living/2024-The-cost-of-living-104-Hon.pdf