Cyclicality of Tax Expenditures: The Case of Israel

Tax expenditures have seldom been studied internationally, primarily due to limited data availability. This paper examines the cyclicality of tax expenditures in Israel, a country that has steadily expanded its reliance on this fiscal tool, which now constitutes a significant share of GDP relative to other OECD countries. Using quarterly data from 1986 to 2016, a notable shift is found in the cyclicality of government decisions on tax expenditures after 1997, coinciding with a substantial reduction in government deficits and debt levels. Specifically, tax expenditures became procyclical during economic expansions and countercyclical during recessions. This latter conduct mirrors patterns observed in the literature on government spending in certain developing economies, which have recently "graduated" to implementing countercyclical spending policies during economic downturns.