ISRAEL

Israel[1] is a unitary parliamentary democracy established in 1948 by the Declaration of the Establishment of the State of Israel.

Israel has no formal written constitution but thirteen “Basic Laws” (and a temporary one) that were passed in 1957 to set up a legal framework. The first Basic Law established the parliament in 1958. It is a unicameral parliament (Knesset) composed of 120 members elected every four years by direct universal suffrage. The Knesset elects the President of the State in a secret vote for a single, seven-year term. The country’s prime minister is the head of government and chief executive, entrusted with the task of forming the cabinet, which is the government’s main policy-making and executive body. Following the Knesset elections, the prime minister is nominated by the President from among the Knesset members after asking party leaders whom they support for the position.

Israel has a rather centralised system of governance, with a single level of subnational governments. Israel’s multi-level governance system is influenced by three factors: 1) British colonial Municipal Ordinances of 1934 and 1941 that are still in place; 2) socialist traditions of Israel’s early governments (1948-1977); and, 3) its economic model called the “developmental state”. No major decentralisation reform or devolution of powers has officially taken place and the central government retains most of the powers and strict oversight of local government activities and finances. Bylaws and ordinances adopted by councils, as well as their budgets, are subject to approval by the Ministry of Interior.

However, some de-facto decentralisation of political power has taken place since the 1970s, starting with the direct election of mayors and chairpersons by universal suffrage since the 1975 Law on the Direct Election of Local Authorities, which went into effect in 1978. Previously, they were elected by local councils from among their members. Council members are elected on the basis of proportional representation for a five-year term. Since then, the central government has gradually withdrawn from delivering and overseeing local services and transferred additional responsibilities to local governments. Several associations of municipalities represent and promote the interests of local authorities, namely the Federation of Local Authorities in Israel, which gathers 202 local governments ; the Regional Councils Centre, which includes the 56 regional councils ; and Forum 15, which comprises 15 municipalities among the most financially autonomous.

In November 2021, following the Government Resolution No. 675, the Israeli government set up an Inter-Ministerial Committee for Decentralisation. Headed by the Prime Minister's Office and the Ministry of Interior, it gathers 15 different ministries, and was aimed to examine the matter of decentralising power and responsibilities to local governments (especially on finances, local legislation, business licensing, social welfare, education, and transportation), and reducing excess regulation in the aforementioned ministries. The Committee consulted with local governments, the third sector, academia and international organisations, before emitting preliminary recommendations for decentralisation in April 2022. The Prime Minister's Office and the Ministry of Interior are currently working with nine government ministries to formulate a government resolution that outlines operative steps to implement the recommendations, including cross-ministerial steps to make coordination and dialogue between central and local governments more efficient, primarily via digitalisation and digital transformation.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
258 local authorities
Average municipal size: 35 863 inhabitants
258			258

OVERALL DESCRIPTION: The 258 local governments are divided into three categories: 76 municipalities, 126 local councils, and 56 regional councils. There are also two local industrial councils, which only manage industrial zones and do not have residents.

In addition, Israel has six statutory administrative districts, which function as deconcentrated central government entities – North, South, Centre, Jerusalem, Tel Aviv and Haifa. They are subdivided into 15 sub-districts. Headed by an officer of the Ministry of the Interior, districts are in charge of overseeing subnational governments. Other ministries also have administrative districts, but they are not statutory. Districts act solely as administrative zones as a means of delimiting national policy plans.

Regional development policies in Israel in the last decade have been guided by the principle to disperse the population and businesses from the country’s centre to the northern and southern regions, through systems of tax exemptions and specific grants.

MUNICIPAL LEVEL: The municipal level in Israel comprises three types of local authorities: local councils with populations between 2 000 and 20 000; municipalities, which are cities of at least 20 000 inhabitants; and regional councils, which cover settlements with less than 2 000 inhabitants, mainly in rural areas (kibbutzim, moshavim and bedouin villages). Regional councils include several localities, and some of them also include urban localities. The executives of regional councils are composed of members elected by each village or community by a simple majority.

In 2020, around 78% of the population lived in municipalities, 14% lived in local councils and 8% in regional councils. The average municipal size is large by international comparison (vs. 10 254 in the OECD on average in 2020). Around 15% of municipalities have fewer than 5 000 inhabitants (vs 41% in the OECD) and 4% fewer than 2 000 inhabitants (vs 26% in the OECD). Several attempts have been made to reduce the number of local councils through mergers. In 2003, 23 local councils were consolidated into 11. However, in subsequent years some of these mergers were reversed. As of April 2022, a new local council was created (Sha'ar Hashomron) that consisted of two villages – Sha'arei Tikva and Etz Efraim – that were formerly part of the Shomron Regional Council.

As of 2022, Israel has 17 cities with populations over 100 000, including Jerusalem (the most populated, with 966 thousand inhabitants), Tel Aviv, Haifa, Rishon LeZion, Ashdod, and Petah Tikva. Four metropolitan regions have been identified (Tel Aviv, Haifa, Jerusalem, and Beersheba). To provide a more comprehensive assessment of both the resources and the economic and social needs of each local government, the Central Bureau of Statistics (CBS) defined 10 socio-economic clusters that are used by the government in the implementation of a number of policies related to local governments.

Income disparities across local governments in terms of income are among the highest in the OECD. The average monthly wage in the richest locality (Savyon) is around 3.5 times higher than in the poorest one (Modiin Illit). Over the last decade the income disparity between the top 10% and the bottom 10% of regions grew by an annual average of more than 5% - the fastest pace among OECD countries.

HORIZONTAL COOPERATION: Inter-municipal cooperation is increasingly popular, in the form of so-called “clusters”. It started as a voluntary bottom-up process with the creation of the Western Galilee Cluster in 2009, under the form of “Regional cluster”. A pilot programme to establish Voluntary Regional Clusters was created in 2012 under the initiative of the Ministry of Interior, the Ministry of Finance and several civil society organisations. Subsequent legislation formalised the legal status of clusters in December 2016. In 2018, their number increased from 5 to 10, the number of associated local authorities increased from 59 to 109, and the scope of budgetary activity increased from about USD 4.16 million to about USD 61 million. Clusters have no legal status, and deal with responsibilities such as environmental protection, waste, veterinary services, transportation, specialised education, economic development, etc.

The 1934 and 1941 Municipal Ordinances provided the legal framework for the local government system including a detailed breakdown of municipalities' responsibilities. This framework is, by and large, still in place today. Other regulations have been adopted since to delimit more precisely between central and local functions and to provide a more robust legal framework for local government responsibilities. However, Israel does not have a comprehensive modern law on subnational government functions, despite past attempts to adopt a new Municipalities Bill, especially in 2007.

Local councils’ responsibilities are divided between compulsory responsibilities, devolved competences, and voluntary services. Services under the statutory responsibility of councils, as specified by law, concern supervision of public works within boundaries, sewage services, sanitary services, veterinary services and more. Most responsibilities in education and social welfare are national services delegated and operated through subnational governments, and their delineation is often unclear. Moreover, local councils sometimes provide additional services (“voluntary services”) according to their preferences and depending on their available resources, in particular in the fields of culture, recreation and environmental protection.

Amendment 101 to the Planning and Building Law (2014) contributed to giving more responsibility and discretion to subnational governments in land-use planning to increase efficiency. By contrast, responsibilities in water and sanitation services are increasingly transferred to municipality-owned companies, regulated under licenses by the Israeli Water Authority (IWA). There are around 56 regional water and sanitation utilities, serving 161 municipalities and local councils (out of 183 authorities required by the association by law). A large part of local authorities also own municipal companies, in charge of executing urban renewal and infrastructure projects, cultural or sports events ; there were around 570 municipal companies as of 2022.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Internal administration (including tax and fees collection)
2. Public order and safety	Urban policies’ enforcement (traffic and public safety, smoking ban in public spaces)
3. Economic affairs / transports	Physical infrastructure; Roads; Development of a long-term employment strategy (since 2006); Local tourism; Municipal transport infrastructure
4. Environment protection	Public parks
5. Housing and community amenities	Water supply and sanitation (see above); Refuse collection and disposal system; Town and land-use planning; Housing; Street cleaning and sanitation; Veterinary services
6. Health
7. Culture & Recreation	Sports activities; Cultural activities (libraries, museums, arts, crafts, orchestras, choirs, theatres and similar enterprises); Youth clubs; Religious services; Recreation areas.
8. Education	Construction and maintenance of schools buildings but only for pre-schools and secondary education institutions; Provision of equipment; Student registration; Schools’ day-to-day operations; Informal education
9. Social Welfare	Social care of families in need; Elderly; Drug addicts; social services and day care for infants (shared)

Scope of fiscal data: local government units (local councils, municipalities and regional councils), as well as approximately 180 religious councils.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Local governments have no formal or permanent status in the Israeli fiscal system, due to the absence of a written constitution. The subnational fiscal framework is spelled out mainly in by-laws and ordinances approved by the Ministry of Interior. The local funding system is composed of grants and tax revenue, and concentrated mainly on one tax, the property tax (Arnona).

Fiscal disparities are strong among municipalities, in particular due to the design of the tax system, which works to the detriment of low socio-economic clusters. Disparities are the most acute between urban vs rural; central vs peripheral; and predominately-Jewish vs predominately-Arab. The recent equalisation system that was set up in 2017 should contribute to reducing the imbalance between councils. In local Arab municipalities in which this issue is particularly sensitive, a special five-year plan, including special budgetary allocations in many sectors, also aims at reducing disparities among municipalities.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	2 500	5.9%	12.8%	100%
Inc. current expenditure	1 897	4.5%	10.8%	75.9%
Compensation of employees	716	1.7%	16.3%	28.6%
Intermediate consumption	636	1.5%	16.8%	25.4%
Social expenditure	135	0.3%	2.9%	5.4%
Subsidies and current transfers	355	0.8%	10.0%	14.2%
Financial charges	9	0.0%	1.0%	0.4%
Others	47	0.1%	14.6%	1.9%
Incl. capital expenditure	603	1.4%	31.3%	24.1%
Capital transfers	12	0.0%	1.9%	0.5%
Direct investment (or GFCF)	590	1.4%	46.4%	23.6%

EXPENDITURE: Although some responsibilities have been decentralised, Israel remains a centralised country from the spending perspective. In 2020, subnational governments accounted for 12.8% of total public expenditure (a slight decrease since 2016) i.e. 5.9% of GDP, which is well below the OECD average for unitary countries (27.5% of public expenditure and 12.7% of GDP in 2020). The budgets for recurring resources and for investment are divided (ordinary and non-ordinary budgets) and managed separately, and are supplemented by their own resources. Subnational staff expenditure accounts for a small share of total public staff expenditure, well below the average for OECD unitary countries (41.4% in 2020).

DIRECT INVESTMENT: Subnational governments are significant public investors in Israel, as investment is one of their main functions, amounting to 23.6% of subnational expenditure (an increase of 3 percentage points since 2016), well above the OECD average for unitary countries (14.8% in 2020). The ratio of subnational investment in total public investment (46.4%) is in line with the OECD average for unitary countries (48.9% in 2020). As of 2020, the level of local investment in GDP remains below the OECD average (1.4% vs 1.9% in OECD unitary countries on average). Most of central government investment is done by public companies whose investment was until recently not fully recorded in the general government sector, and as a result, the real extent of central government investment has long been under-estimated. Subnational governments’ capital investment plans must be detailed and submitted for approval by the regulator. However, co-ordination between central and local governments regarding investment is hindered by the overlapping of responsibilities across levels of government.

Most local investment are targeted to economic affairs/transportation (30% in 2019), followed by education (29.6%). Recently, “roof agreements” were signed between the central governments and around 30 subnational governments, as part of the government’s efforts to increase new housing supply, by providing financing for infrastructure development at the local level. The use of public-private partnerships is limited in Israel, although the central government is planning to increase infrastructure investments in the future, as part of the recovery plan, mostly through PPP Model. PPP projects are under the supervision of the PPP Project Unit located within the Infrastructure and Projects Division at the Accountant General Department in the Ministry of Finance.

Subnational government expenditure by functional classification
2019	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	2 469	5,8%	-	100%
1. General public services	276	0,7%	12,3%	11,2%
2. Defence	13	0,0%	0,6%	0,5%
3. Security and public order	18	0,0%	2,6%	0,7%
4. Economic affairs/transports	210	0,5%	16,7%	8,5%
5. Environmental protection	201	0,5%	86,4%	8,1%
6. Housing and community amenities	121	0,3%	99,2%	4,9%
7. Health	8	0,0%	0,3%	0,3%
8. Recreation, culture and religion	283	0,7%	40,6%	11,4%
9. Education	926	2,2%	26,0%	37,4%
10. Social protection	415	1,0%	6,7%	16,8%

Education is by far the biggest area of local spending, representing 37.4% of subnational government expenditure in 2019, a much larger share than the OECD average of 24.3%. Local governments are also particularly active in the social protection sector, which accounted for 16.8% of their expenditure in 2019, above the OECD average (14.1%). Education and social protection are delegated functions for which subnational governments receive specific grants from the central government. Therefore, they are subject to control by the central government and only have limited discretionary powers in these sectors. Subnational governments can also decide to increase their educational and social welfare expenditure above the governmental contributions if they have sufficient own-resources for this purpose. In addition, Israeli local governments are responsible for the vast majority of overall public spending in the areas of housing and community amenities and environmental protection.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	2 542	6,0%	17,3%	100%
Tax revenue	1 010	2,4%	9,6%	39,7%
Grants and subsidies	1 372	3,2%	-	54,0%
Tariffs and fees	104	0,3%	-	4,1%
Income from assets	20	0,1%	-	0,8%
Other revenues	37	0,1%	-	1,5%

OVERALL DESCRIPTION: Subnational government revenue in Israel as a share of GDP and as a percentage of public revenue is one of the lowest amongst OECD countries, well below the OECD averages for unitary countries (12.7% of GDP and 31.6% of public revenue in 2020). Subnational governments receive income from two main sources: taxation and grants and subsidies. Tax revenue accounted for a significant part of local revenue in 2020, above the OECD average for unitary countries (35.4%). Local taxes are, however, mainly concentrated on a single tax, the property tax (Arnona). There have been several discussions to reform this system in the past, with the proposal to create a business tax in 1981 and 1985. In 2007, the “Barzilai Commission”, appointed by the Ministry of Interior in 2007, confirmed the need for structural changes. Among the government's priority reforms listed in 2021, a reform of local government funding is planned, including a reflection on reforming the Arnona system.

The share of grants and subsidies in local revenue is slightly below the OECD unitary countries on average (53.3%). Municipalities belonging to lower clusters depend significantly more on grants from the central government. For instance, the share of own-source revenue in municipal budgets ranged from around 10% in Hura or Laqye, up to 80% in Haifa or Tel-Aviv in 2020.

TAX REVENUE: Although tax revenues are a major source of subnational government revenues, they amounted to only 2.4% of GDP in 2020 (vs 4.5% in the OECD unitary countries on average) and 9.6% of public tax revenues (vs 18.7% in the OECD unitary countries on average).

The largest source of subnational government tax revenue is by far the local property tax (Arnona tax). The recurrent property tax represented 75% of subnational government tax revenue and 30% of total subnational government revenue in 2020, and 1.8% of GDP, almost twice higher than the OECD average (1.0%). This tax is levied on land and buildings, based on the measured surface area (and not on value). It has two components: one for residential properties (around 44% of total Arnona receipts) and the other for non-residential properties (around 56%). Until 1985, local councils had the authority to set their own tax rates. However, in 1985, as part of the stabilisation programme, all Arnona rates were frozen by the Knesset. They have not been reinstated, although they are adjusted based on inflation. Each municipality can request a change in the rate, conditional to the approvals of both the Ministers of the Interior and the Treasury. Overall, residential property tax receipts remain low, and in most cases, they are not sufficient to cover the costs of providing public services to residents.

In 1993, properties were assigned to various categories depending on how they are used. Depending on the classification, minimum and maximum rates are applied. The central government has set 13 main property categories at the national level. Each council has its own subclasses, i.e. its own classification of buildings and neighbourhood zoning for the purpose of calculating the annual municipal tax rates per square metre. It has the authority to change sub-classifications (i.e. the type of property) and to propose changes to specific Arnona rates. However, both increases and decreases must be approved by the Ministers of Finance and of the Interior. Municipalities are also allowed to grant exemptions or discounts for certain categories of taxpayers and are responsible for tax collection. Due to a significant imbalance in the level of tax rate between the Arnona on residential and non-residential buildings (which is higher than the residential one), the property tax system is regressive and tends to exacerbate fiscal disparities among municipalities. Discussions are on-going on reforming the property tax, as part of the broader local financial system, in order to reduce fiscal disparities and increase the capacity of local councils.

Other tax revenues include the “betterment tax” or levy (Hetel Hashbacha, 15% of local tax revenue i.e. 6% of local revenue in 2020), which relates to the change in the real estate value of the property (home or land) due to a land-use zoning change or the approval of additional building rights. Local government can also charge levies for the development of infrastructure in the local council (e.g. for paving, sewage, channelling and draining, water pipelines and open public spaces).

GRANTS AND SUBSIDIES: There are three categories of central government transfers: 1) transfers earmarked to delegated responsibilities in education and social welfare (respectively 56% and 21% of total grants in 2019); 2) a general balancing grant (14%); and, 3) other grants, including the new equalisation fund grant (Arnona fund) (10%).

Overall, in 2020, current grants accounted for 76% of total grants (an increase since 2016) and capital grants the remaining part (24%).

Earmarked grants for education and social welfare originate from the Ministry of Education and of Welfare. They are granted according to the “matching” principle. In the social sector, every service (mainly salaries) financed by the local authority receives 75% of its funding from the State, and must cover the rest from its own fiscal resources (in most cases from the property tax). Local authorities are often unable to fund the remaining 25% and have to cut welfare costs accordingly. In the education sector, this percentage varies depending on what is being funded (on average, 85% of total spending in education comes from central transfers).

The general balancing grant is designed as an equalising grant targeted to subnational governments with limited amounts of own-revenues so they can meet their public service responsibilities. Individual allocation is determined annually by the Ministry of Interior, based on a complex formula. While most of the balancing grant is distributed as a block grant in support of local governments’ regular budgets, a portion of the grant (no more than 15%) is conditional on meeting certain criteria (e.g. performance in tax collection). In 2017, 79% of total municipalities received balancing grants.

In 2017, a new equalisation fund was implemented (Arnona fund) to redistribute resources derived from the property tax more equally across municipalities. Drawing on the Arnona paid by the central government on its own assets, the amount is set by the Law of Finances. Eligibility to the fund and distribution keys are based on criteria such as socio-economic index, lack of non-residence Arnona, periphery index, and financial management. In 2017, 74% of local governments received an allocation from the equalisation fund.

Sectoral ministries also provide development grants for specific local projects such as educational and cultural facilities, roads, water and sewage systems, as well as general development grants for projects selected by local preference. Other grants are for specific purposes such as implementing the national agenda or the capital grant for the city of Jerusalem, etc.

In local Arab municipalities, where fiscal disparity issues related to land are particularly sensitive, a special five-year plan has been established to support development projects and reduce disparities (Israeli Government Resolution 922 of December 2015). It includes special budgetary allocations in many sectors such as education, public transportation, road infrastructure, water and sewage infrastructure, employment, housing and public safety.

Special fiscal recovery grants are also given to local authorities that have accumulated deficits and are engaged in the fiscal recovery programme.

OTHER REVENUE: Other revenues include charges and fees for the use of local educational, social, cultural and recreational services, income generated from bylaws, etc. They generally derive from payments that parents make for various education-related services and from activities that seniors pay for. Local councils are also empowered to collect fees for specific services provided to residents, such as sewage, refuse, signage, or security. However, the share of user charges and fees in Israel (4.1% of subnational government revenue) remains particularly low compared to the OECD average for unitary countries (9.1% of local revenue in 2020). Property income deriving from rent and sales of local assets (land and buildings) as well as from dividends paid by water companies accounted for 0.8% of revenues, slightly above the OECD average for unitary countries (1.1% in 2020).

Subnational government fiscal rules and debt
2019	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt (consolidated?)	829	2.0%	2.7%	100%	-
Financial debt	424	1.0%	1.5%	51.1%	100%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	0	-	-	0.0%	0.0%
Loans	424	-	-	51.1%	100%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	405	-	-	48.9%	-

FISCAL RULES: Israeli municipalities operate under tight regulatory supervision from the Ministry of Interior. Along with the Ministry of Finance, it approves local government budgets and audits their accounts. Under the Municipalities Ordinance (Budget Preparation), local councils must be financially balanced, and if a deficit exists from previous years, the council must allocate, in the budget, the sums required to cover the deficit. Since 2014, subnational governments have been classified according to fiscal wealth and budgetary performance criteria. “Stable” local governments that fulfil standards have been granted more independence from central authorities, and are exempted from obtaining approval with respect to wages, hiring, bank loans, enactment of municipal by-laws and other regular operations. As of 2021, 27 councils met these criteria. Conversely, authorities that fail to meet the standards are put under administration (the “fiscal rehabilitation” programme) and run by a state accountant. The State Comptroller and Ombudsman of Israel regularly publishes an audit report on the situation of local government finance. Whereas there are no dedicated bailout funds nor formal credit support from the central government, the latter may provide ad-hoc support to municipalities in difficulties through grants.

DEBT: Municipalities can borrow only to finance investment projects (“golden rule”), although in rare cases it can also be used to balance the operating budget. Subnational governments need the authorisation of both the Ministries of Interior and of Finance prior to borrowing, and they can only borrow if their total outstanding loans do not exceed 75% of their own revenue (including grants) in any fiscal year. This does not apply to the “stable” 27 local governments.

The tightening of controls on councils’ budget balance and debt led to a consistent decrease in their debt level, and to the significant improvement in their financial strength. In 2019, subnational government debt was low by international standards, well below the OECD average for unitary countries (14.5% of GDP and 10.5% of public debt on average). In 2019, other accounts payable (i.e. commercial debt and arrears) accounted for almost half of total outstanding debt, and had been increasing since 2016 (when it accounted for 42% of subnational government debt). The other half of local debt is composed of the financial debt, which includes only loans, as bonds remain negligible.

TERRITORIAL MANAGEMENT OF THE CRISIS: Israel responded rapidly at the national level during the prevention and mitigation phases of the pandemic, and several coordinating mechanisms were put in place to ensure on-the-ground implementation of emergency measures. The central government created a Centre for Local Government to provide regular updates and guidelines to local governments, and to ensure the implementation of government measures on the ground. The situation room of the Centre dealt with inquiries from local authority managers, and organised conferences on local leadership during the COVID-19 crisis, in partnership with the Federation of Local Authorities in Israel. In September 2020, the Ministry of Health developed a “traffic light model” part of its prevention and mitigation strategy. According to this model, every local council was ranked “red”, “orange”, “yellow” or “green” based on indicators such as new COVID-19 cases and infection rate (updated every two weeks). Consequently, restraining and prevention policies were applied.

The Israeli vaccination campaign is supervised centrally, but it mobilises community-based health maintenance organisations (HMOs), with IT and logistical and capacity, in order to reach peripheral regions, villages and towns. As they operate under logistical constraints, good coordination between the Ministry of Health and local authorities is essential. Local officials, community leaders and HMOs, whom citizens tend to trust more than the central government, have also helped convince populations to accept vaccination. Cooperation and knowledge-sharing across local authorities was facilitated via the 265 National Project, launched by the Ministry of Interior, which aims to accelerate digital transformation in municipalities. Inter-governments dialogue also took place through regular inter-local authority forums.

Overall, the COVID-19 crisis had a differentiated impact across Israel’s territory, especially in the short term. The most touristic destinations and metropolitan regions suffered more from employment losses than other regions. At the same time, the first phase of the outbreak disproportionally affected poorer Haredi neighbourhoods, where the infection rate was the highest. There was also territorial disparities in vaccine uptake rates, driven by demographics and socioeconomic differences between municipalities (proportion of elderly, share of active population, etc). Overall, the pandemic has exacerbated long-term challenges of high poverty, especially among the Ultra- Orthodox and Arab Israelis, and economic sectors.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: According to the State Comptroller’s Office, Israeli local authorities were ill-equipped to face the consequences of the COVID-19 crisis, due to a lack of preparedness. The central government provided a financial support of ILS 2.7 billion to support local authorities to face the crisis and ensure the sustainability of public service provision. Local authorities intervened mostly to provide food and medication supplies to their residents, as well as isolation shelters, with the support of subnational government associations such as the Federation of Local Authorities.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: Due to the centralised nature of local government finance in Israel, the crisis had a negligible impact on local government finances. The level of subnational expenditure has remained unchanged between 2019 and 2020 (in real terms), whereas subnational revenues barely increased (by 1%). Local governments have suffered a loss of revenue from assets (-44% between 2019 and 2020, in real terms), user charges and fees (-16%) social contributions (-9%) and tax revenue (-8%). Subnational revenue from the property tax decreased by 8%, due to tax exemption measures that were set up during the pandemic. However, this loss was compensated by an increase in transfers from the central government (+17%), both current and capital grants. The central government compensated 100% of the losses induced by property tax exemptions, lockdown and economic contraction, except for subnational governments with “robust finances”, which were entitled to a 92% compensation. Central government support lasted until June 2021.

The crisis had a broader incidence on general government finance. The increase in total public expenditure between 2019 and 2020 (+14%) was based on a rise of subsidies and capital transfers (respectively +64% and +33%), including to local governments. This rise was combined with a drop of 4% of total public revenues, mainly driven by a decrease in the CIT and excise taxes at national level. Public debt increased slightly at both local and national level. Despite support from the central government, some local governments were forced to increase their debt to balance their budget at the end of 2020, as the central governments approved their requests for new loans from commercial banks. By taking fiscal consolidation measures, the central government plans on a budget deficit of 3.9% in 2022, down from around 11.6% in 2020.

ECONOMIC AND SOCIAL STIMULUS PLANS: In 2021, the Israeli government unveiled an economic plan of ILS 100 billion (adjusted from ILS 80 billion initially announced in March 2020). The plan is composed of four blocks: 1) health and civil provisions; 2) expansion of the social security net; 3) business continuity; and 4) an economic acceleration plan. As part of the economic acceleration plan, ILS 1.1 billion was dedicated to the acceleration of infrastructure investment, in particular to improve transportation. ILS 0.3 billion were also allocated to improve the provision of public services to citizens through digitalisation, including the development of digital learning systems in education, higher education and vocational training.