Israelis have more money saved up than ever before, yet according to Ministry of Finance chief economist Dr. Shmuel Abramzon, this very strength is becoming a burden on the economy. He argues that while high savings rates and tax benefits provide a safety net, they simultaneously prevent private consumption from reaching its full potential. In an interview with *Globes," Abramzon stressed that excess savings are stifling growth and addressing tax benefits is the logical first step.
"The wealth effect Is limited"
"There is indeed talk about consumption being relatively low in recent years, but we at the chief economist’s division believe the situation isn't as dire as portrayed," says Dr. Abramzon. "Private consumption has grown consistently in recent years. In 2025, it crossed the NIS 1 trillion mark for the first time, and private consumption spending per capita surpassed the NIS 100,000 annual threshold. We are seeing real growth compared with the pre-Covid period as well despite supply constraints, rising interest rates, and economic challenges. What is actually lowering the consumption-to-GDP ratio is the unusually strong growth in specific components of exports, investments, and government spending."
But we do see a gap in consumption, given that the annual growth rate has contracted. "There were reasons for this: supply constraints due to the pandemic and the war, a higher interest rate environment, and tax hikes required to fund the war. Yet, the growth remains positive year-on-year."
Yet, the growth isn't at the levels one might expect given the surge in the public's asset portfolio.
"A large portion of the portfolio isn't managed directly by the public but by institutional investors; consequently, these funds are largely locked away from the public and do not translate into immediate consumption. Data indicate that savings in Israel are exceptionally high - both at the aggregate economic level and at the household level. The Ministry of Finance has therefore concluded that there is a certain degree of excess saving, driven in part by structural factors. These include mandatory pension schemes, public sector wage agreements, and tax incentives, all of which lead Israelis to save far beyond the mandatory requirements. Israel’s mandatory pension contribution rate - 18.5% (up to the average wage) - ranks us second in the OECD."
In Abramzon’s view, this high level of savings also has downsides. "The positives are quite clear: it creates system stability and makes it easier for households to cope with crises. This is evident in the ability of Israelis to meet debt and mortgage payments, despite challenges such as high interest rates and a slowdown in the real estate market. However, the downside lies in consumption rates that fall below the OECD average - impacting wellbeing, economic growth, and potentially the exchange rate. I wouldn't want to trigger a revolution here, but I do believe we are in a state of imbalance that holds back some of the economy's potential."
NIS 40 billion annually
In OECD countries, old-age pensions are more generous; thus, in Israel, the savings - even if they appear excessive - help households in retirement age to age with dignity.
"According to all studies and estimates conducted, even when old-age pensions are factored in, the replacement ratio here is perfectly fine. Of course, one must consider the value of old-age pension benefits, while remembering that - unlike private savings - they are funded by public money."
What measures are being planned in this regard?
"The Ministry of Finance, together with the Capital Markets Commissioner, is working on formulating recommendations for the next government. The Ministry's long-standing position is that tax benefits for advanced training funds and pension plans - estimated at about NIS 40 billion and NIS 13 billion annually, respectively, are relatively high and difficult to justify in their entirety, especially given the mandatory pension contribution requirement. Some of these benefits are even outliers by international standards."
Could it also be argued that the size of the public's asset portfolio affects state revenues? After all, when people liquidate their investments, they pay taxes.</i?
"Regarding tax implications, the state coffers would receive more revenue from increased consumption, which is subject to VAT and income tax, than from savings, a large portion of which is tax-exempt. Reducing tax breaks would allow for broader-based reductions in tax rates."
If the goal is to boost consumption, perhaps the IMF's recommendation to raise VAT isn't the right move for Israel?
"Certainly, raising VAT or income tax, in and of themselves, dampens consumption. However, that is a narrow view. Ultimately, one must look at the entire tax system. Recommendations like those from the IMF focus on the long term and address alternative taxation strategies. We believe the right approach is to first reduce exemptions and tax breaks, on savings and elsewhere, and only then discuss other tax hikes. In the long run, if I had to choose between raising VAT and raising income tax, I would opt for VAT but we must first address the various exemptions and tax breaks."
Published by Globes, Israel business news - en.globes.co.il - on September 14, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.