From 1961 to 1983, government expenditures grew far more rapidly than Israel's GNP, primarily because of the sharp increase in defense outlays from the latter half of the 1960s through the 1970s. Taxation was insufficient to finance the increase in government spending. Although gross taxes increased, net taxes declined continuously during the period. To meet the deficit, the government resorted to domestic and foreign borrowing.

By the mid-1970s, the government increasingly relied on foreign sources to finance the domestic deficit. These growing debts were equivalent to almost 14 percent of each year's GNP, during a time when GNP was growing at less than 2 percent a year.

In the second half of the 1970s, the tax system collected approximately 47 percent of GNP, compared with 35 percent in the 1960s and 41 percent in the first half of the 1970s. This rise occurred mainly in direct taxes and taxation of domestically produced goods, while taxes on imports declined by a small margin. During FY 1981, direct taxes represented 25.7 percent of GNP they were 14.3 percent of GNP in FY 1961. Taxes on domestic production represented 12 percent of GNP in FY 1981, a decline from the FY 1961 high of 13.9 percent. The introduction of the value-added tax on both domestic and foreign goods added a tax base of 8.7 percent of GNP in FY 1981.

In FY 1986, income taxes collected represented 33 percent of GNP. Value-added taxes represented 20 percent of GNP and customs duties represented 4 percent of GNP. In late 1987, the government announced plans to revamp the tax structure in the light of the 1985 Economic Stabilization Program (see The Economic Stabilization Program of July 1985 , this ch.).

Data as of December 1988