Israel’s Huge Black Economy

“Israel’s black economy totals an estimated NIS 185 billion in 2013, 18.9% of the country’s economic activity,” according to Visa Europe in a new study.

While the illegal economy’s proportion of the total economy in Israel is comparable to other Mediterranean countries (Italy, Spain, Portugal, Greece, and Turkey), it is greater than in Western Europe, North America, and developed Asian countries.

Visa Europe attributed the phenomenon to, among other things, high taxes and bureacratic foot-dragging.

The problem of the parallel economy is likely to grow only worse, given Israel’s economic crisis, the budget deficit, austerity measures, and the erosion of the middle class.

Legislation to reduce tax evasion and the use of black capital in the markets is included in the proposed budget. However, Visa Europe recommends instead that resources should be focused on reducing the use of cash.

Visa Europe Israel country manager Oded Salomy explained that “When using cash, it’s easier to conceal income, but when using other means of payments, especially Visa credit cards, the chances of concealing income are greatly reduced. To reduce the black economy in Israel and increase the government tax receipts, we suggest taking measures which will increase the use of credit cards.”

There were 134 electronic transactions per capita in Israel in 2011, of which 95 were credit card transactions. With an average of 0.77 credit cards per capita and 14 terminals per 1,000 people, increasing the use of electronic transactions is seen as viable.

According to estimates, if electronic transactions increase by 10% per annum over the next two years, they could reduce the parallel economy to 17% of GDP in 2015, all other factors being equal. Even so, the increase to date in credit card use has helped reduce the size of the parallel economy by NIS 16 billion since 2010.

This article appeared in print on page 29 of the June 26th, 2013 edition of Hamodia.