Prime Minister Binyamin Netanyahu and Finance Minister Moshe Kahlon (Kulanu) announced the reduction of Value Added Tax (VAT; Israel's sales tax – ed.) from 18% to 17% and corporate tax reduction from 26.5% to 25% on Thursday night, citing the need for economic growth.
"With high taxes, the economy does not grow," Netanyahu stated. "To encourage growth, I have decided together with the Minister of Finance to reduce taxes. We can do this because the state coffers have accumulated billions in surplus taxes."
"We decided to return the money to you – the citizens of Israel," Netanyahu added. "I have confidence in you, the citizens of Israel. We believe in initiative, we believe in growth, we believe in freedom."
"In recent months, the state treasury accumulated a surplus of billions," Kahlon stated. "This money came from citizens and we intend to return it to citizens."
"We are returning the money in two ways, by reducing the VAT rate and by reducing corporate tax," said Kahlon. "If there are additional surpluses we have the intention to lower more taxes, if, God forbid, will be a slowdown in tax revenues we will need to make a correction."
The price reduction is projected to cause the State of Israel to lose some 6.5 billion shekel ($1.6 billion) annually.
A reduction in VAT was made possible due to excess tax collection, according to Yediot Aharonoth. In July, the state budget deficit stood at a level of 2.1% of Gross Domestic Product (GDP), while the full year's GDP target was 2.9%.
The result: surplus taxes to the tune of 8 billion NIS ($2.1 billion), with some 10 billion NIS ($2.5 billion) predicted to be collected in total by the end of 2015.
The decision was made following a damning report from the Central Bureau of Statistics (CBS) in August stating that Israel's economy had grown by a mere 0.3% during the second quarter of 2015. To counter this, a drop in VAT is expected to lower market prices and increase consumption. The move will also reverse an increase in VAT in 2013 made to counter a deep deficit.
Analysts predict that VAT will eventually be raised again, predicting that the total cost of the move will not be able to be replenished entirely by a market upswing.