Dim Amor

A historical review of the value-added tax rate in Israel since the 1990s reveals a consistent pattern: VAT tends to rise during periods of deficit, wars, or economic slowdown, and decline mainly during periods of growth and fiscal stability. Data spanning three decades indicate that VAT has served as a central tool for balancing the budget, with changes implemented in accordance with economic conditions and significant fiscal events.

Historical Pattern: Increases in Crisis, Reductions in Growth

The history of VAT in Israel shows a clear cycle. In most years, the rate ranged between 15.5% and 18%, with changes occurring during periods of fiscal pressure or economic recovery.

In 1991, VAT was raised to 18% during a budget crisis. In 2002, it again rose to 18% amid a deficit and economic slowdown. Between 2006 and 2010, VAT was gradually reduced to 15.5% during a period marked by growth and tax cuts. In 2013, VAT was again increased to 18% due to fiscal pressures, and in 2015 it was lowered to 17% to stimulate economic activity. In 2025, VAT was once more raised to 18% amid a deficit and increased defense spending.

These figures indicate that VAT changes were not arbitrary, but rather functioned as a fiscal tool responding to the state’s budgetary condition.

VAT as a Budget-Balancing Tax

According to the historical pattern, VAT in Israel functions as a “budget-balancing tax.” When the state faces a high deficit, the tax rate tends to rise. When economic growth strengthens and tax revenues increase, it becomes possible to reduce the rate or maintain its stability.

The advantage of VAT as a fiscal policy tool lies in its ability to increase revenues relatively quickly, without requiring complex structural changes to the tax system, while providing stable income to the state treasury.

Conditions for Tax Increases

An examination of the periods in which VAT was raised points to several recurring conditions:
high budget deficit;
increased defense spending or an economic crisis;
rapid growth in public debt;
pressure from the Ministry of Finance or the Bank of Israel.

These conditions were present in the early 1990s, the early 2000s, in 2013, and again in 2025.

Conditions for Tax Reductions

VAT reductions occurred mainly during periods of economic growth, when government tax revenues increased, or when decisions were made to encourage consumption.

Thus, between 2006 and 2010 VAT was gradually reduced, and in 2015 it was again lowered to 17% to stimulate the economy.

Sequence of Changes: From 15.5% to 18%

An examination of the most recent period highlights the trend: after a gradual decline to 15.5% between 2006 and 2010, and subsequent stabilization at 17% from 2015 onward, VAT was again raised to 18% in 2025. This represents a cumulative increase compared with the lower VAT levels recorded in the previous decade.

Analysis by Prime Ministers’ Terms

A review of VAT changes by the terms of prime ministers presents the following picture:

2006–2009: Ehud Olmert
During this period, VAT reductions began as part of a policy of tax cuts and economic growth.

2009–2013: Benjamin Netanyahu
VAT was first increased in 2012 and then to 18% in 2013, amid a deficit and fiscal pressures.

2013–2015: Benjamin Netanyahu
VAT remained high until it was reduced in 2015.

2015–2020: Benjamin Netanyahu
VAT fell to 17% and remained at that level for several years.

2020–2021: Benjamin Netanyahu
Even during the COVID-19 crisis, VAT remained at 17% and was not increased.

2021–2022: Bennett–Lapid Government
Naftali Bennett served as prime minister from June 2021 to July 2022, followed by Yair Lapid until December 2022. During this period, VAT remained at 17% without change.

2022–2025: Benjamin Netanyahu
During this period, amid a deficit and increased defense spending, VAT was raised to 18%.

Factual Conclusion from the Data

The data indicate that VAT declined during part of Netanyahu’s tenure, remained stable during the Bennett–Lapid government, and was raised again after 2022. The primary pattern emerging from the data is that changes in VAT are first and foremost linked to the overall fiscal condition, rather than necessarily to a specific prime minister.

When the deficit grows and government spending rises, the VAT rate tends to increase. When the economy shows growth and tax revenues rise, the VAT rate tends to fall or remain stable.

Outlook for the Coming Years

Based on the historical pattern of the past three decades, periods of higher VAT—around 18%—typically last between two and five years following an economic or security crisis. Periods of lower VAT, around 16%–17%, usually occur after several consecutive years of growth.

According to the current economic scenario, if the deficit remains high and defense spending continues to rise, the VAT rate may remain at 18% and could even increase to 19% in the future. Estimates among economic analysts point to a possible rise to 19% or even 20% in the coming years, depending on post-election budget developments and government spending policies.

However, if the economy returns to significant growth, the deficit declines, and tax revenues increase, it may become possible to reduce VAT back to 17%.

An assessment based on the historical pattern suggests that if economic recovery occurs, a downward shift may be possible around 2027–2029. Conversely, if fiscal pressures persist, the VAT rate may remain high or even increase further.

Historical data indicate a consistent cycle in Israel’s VAT policy: during periods of crisis and deficit, the rate rises; during periods of growth and stability, it declines or remains unchanged. Over the past three decades, VAT has ranged between 15.5% and 18%, with increases occurring mainly amid fiscal pressures and reductions during periods of growth.

At present, VAT stands at 18%, and under certain economic scenarios it may rise to 19% or even 20% in the future if the deficit and government spending continue to grow.

Photo from the Knesset website – used in accordance with Section 27A of the Copyright Law.