# **2 Tax revenue and public expenditure**

## **This section provides an overview of tax and public expenditure instruments in the West Bank and Gaza.**

This report assesses 89 percent of all tax revenue the PA collects and 42 percent of primary government expenditures.

- **2.1 Overview of the fiscal system**

## **Table 2-1 shows the disaggregation of tax revenue and government expenditure for the West Bank and Gaza in 2017, based on official government sources.**

## **Tax revenue represents 20.7 percent of GDP in 2017, and this report models around 89 percent of this**

**(equivalent to 18.5 percent of GDP).** About 19 percent of GDP stems from indirect taxes levied on consumption, production, and trade activities, while direct taxes represent 1.7 percent of GDP.  Indirect tax collections stem mostly from taxes on international trade (7.1 percent of GDP), followed by VAT (5.9 percent of GDP), and excises (5.2 percent of GDP). Within direct taxes, Corporate Income Tax (CIT) represents the largest source of revenues (0.9 percent of GDP), followed by payroll taxes (0.4 percent of GDP), and the PIT (0.3 percent of GDP). We model 95.8 percent of indirect taxes (VAT, customs duties, and excises)—omitting only taxes on use of goods, and permissions—but only 18.3 percent of direct taxes (PIT and property tax). The small share of direct taxes modeled is mainly due to the inability of a CEQ assessment to measure CIT.<sup>20</sup>

## **Total primary government expenditure is 27.4 percent of GDP in 2017, and we model 42 percent of that**

**(to the value of 11.6 percent of GDP).** Social expenditure is 14.1 percent of GDP, while non-social government expenditure represents 13.3 percent of GDP. We model 81 percent of social expenditures and about 1.5 percent of non-social government expenditure by including the indirect subsidies on electricity and fuel. The main government social expenditure categories included in this study are education (5.0 percent of GDP), social protection (4.5 percent of GDP) and health (3.9 percent of GDP). We model 79 percent of education expenditures, 92 percent of social protection expenditures, and 84 percent of health expenditures. According to available information, indirect subsidies reached only 0.2 percent of GDP (Table 2-1). Most of the non-social expenditure stems from public order and safety (7.3 percent of GDP) and general public services (4.4 percent of GDP excluding debt transactions), which are not included in the current fiscal incidence model. The latter categories are all public goods for which the CEQ framework has no standard methodology for allocation. (See Box 3.2 on caveats and limitations of the methodology).

## **Table 2-1 Total revenue and government expenditure in the West Bank and Gaza in 2017 is 27.0 and 27.4 percent, respectively, of GDP**

Total revenue and government expenditure, West Bank and Gaza (2017)

|**Year of Budget Data: 2017**|**W**|**est Bank and**|**Gaza**|
|---|---|---|---|
|**Government Revenue & Expenditure**<br>**(Million NIS, unless otherwise specified)**|Total (%<br>of GDP)|Included<br>(Yes/No)|Total<br>included as<br>% of GDP|

> 20 The CIT is better modelled with tax administrative data. Also, it is a challenge to distribute CIT burdens across households.

10