The International Monetary Fund (IMF) today published its latest survey and recommendations for the Israeli economy after its delegation visited the country in February. The IMF sees the fiscal deficit at 5.3% this year, not 4.9% as forecast in the state budget, and that Israel’s debt-to-GDP ratio will jump from 70% to 74% within four years due to high defense spending.
The IMF recommends reducing the government deficit to 2.5% over the next three years and bringing the debt-to-GDP ratio down to 60% by 2040, similar to the period before October 7. The organization recommends increasing the revenue side of the state budget, given that civilian and infrastructure spending in Israel is low relative to the OECD.
Measures recommended by the IMF include the abolition of the lowest income tax bracket (10%) and its merger with the second lowest tax bracket (14%). The IMF’s position is that since low-income earners do not fully utilize the income tax credit points, such a step will not affect their tax payments, but will be collected mainly from higher-income earners without affecting their marginal tax rate.
The IMF also recommends reexamining exemptions such as VAT on fruit, vegetables, and tourism services, tax exemptions for educational funds – which they define as “irrational” – and corporate tax exemptions. The organization also recommends maintaining the taxation on disposable tableware and sugary drinks and raising the VAT rate.
Regarding the tax system in Israel, the authors of the report note that it is complex with many incentives and differential treatment in relation to regions or sectors and that it should be simplified, streamlined and made fairer. Regarding government spending, they recommend directing budgets to programs that support growth in the economy, such as education and the integration of the Haredi and Arab populations into the labor market.
The IMF explains that increased defense spending, higher public debt and reduced labor supply are clouding the prospects for medium-term growth. These are in addition to structural weaknesses, mainly labor market participation and the skills gaps of the haredi and Arab populations.
The IMF also warns that defense spending that continues to grow will crowd out investments that promote economic growth in human and physical capital, and thus continue to widen the gap in Israel’s GDP per capita compared with other advanced economies. The recommended reforms are expanding the labor supply, strengthening productivity through reforms and investment in infrastructure, and preserving Israel’s competitive advantages. In tech and AI.
On the Bank of Israel’s interest rate policy, the IMF calls on the central bank to continue with a moderate policy, but noted that the major exposure of banks in Israel to real estate poses a risk, especially due to the weakness in the industry.
Published by Globes, Israel business news – en.globes.co.il – on July 1, 2026.
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