Local Government Finance in Israel

Local government finance in Israel is the system through which municipalities, local councils and regional councils raise and receive funds to provide services and maintain infrastructure. Its main components are locally collected revenue—especially municipal property tax, or arnona—central-government grants, service fees and other income, and borrowing subject to legal and administrative controls. The system combines local responsibility for service delivery with substantial central oversight.^[1][2]

Local authorities and their responsibilities

Local authorities provide a wide range of services affecting residents and businesses. These include local roads, planning and construction, sanitation, sewage and water systems, education, welfare, culture and sport. The State Comptroller describes authorities as responsible for both physical and social infrastructure, while noting that they have discretion to prioritize actions within their areas of responsibility, subject to law.^[1]

The institutional structure includes municipalities, local councils and regional councils. Their populations, geography, economic activity and service needs differ considerably. These differences affect both expenditure requirements and the ability to raise revenue locally. The Ministry of Interior is the central government body with responsibility for local government, including supervision and related administrative functions.^[2]

Revenue sources

Local authorities finance their regular operations from a combination of own-source revenue and transfers from the central government. The OECD describes central grants and arnona as principal elements of the Israeli local-government revenue system.^[3] Own-source income also includes charges and fees for certain services, as well as other municipal receipts. The mix differs among authorities, in part because commercial activity, property values, population and local economic conditions are unevenly distributed.

### Municipal property tax (arnona)

Arnona is a recurring municipal tax levied on property. The State Comptroller identifies it as the primary tax collected by local authorities and an important source of funding for their duties and services.^[1] It is generally assessed with reference to characteristics such as the property’s use, location and area. The system applies to residential and non-residential properties, with rules and rates operating within a national legal and regulatory framework.^[3]

Arnona is significant not only because of the revenue it raises but also because the tax base varies among jurisdictions. Authorities with substantial commercial or industrial property may collect more revenue from non-residential properties than authorities with a narrower local tax base. Consequently, differences in the local stock of taxable property can translate into differences in fiscal capacity, even where service responsibilities are comparable.^[3]

Discounts, exemptions and other relief affect the amount collected. A Bank of Israel research paper estimates that residential arnona exemptions, waivers and discounts have a substantial aggregate value and describes the scheme as part of the implementation of national social policy by local authorities.^[4] The study also highlights a structural feature: central rules establish a framework for relief, while local authorities administer the benefits and bear the resulting effect on their revenue. The paper’s estimates relate to the periods and methods described in that research and should not be read as a current annual total.^[4]

### Grants and transfers

Central-government transfers supplement local revenues. Balancing grants are intended to help authorities with weaker revenue capacity meet expenditure needs and provide a basic level of services. Other grants may be linked to particular programs, functions or projects. The OECD’s review treats the grant system alongside arnona as a central part of local-government finance and examines how the two interact.^[3]

Transfers can reduce differences in fiscal capacity, but they also connect municipal budgets to national rules and administrative decisions. Grants may be conditional, calculated according to allocation criteria, or tied to specified purposes. The State Comptroller’s reporting on recovery plans documents cases in which access to loans and grants was connected to meeting targets and requirements set for local authorities.^[1] The overall effect of a grant on an authority therefore depends on its design, eligibility conditions and the authority’s ability to satisfy them.

### Fees, charges and other income

Authorities also collect fees and charges associated with municipal services and activities. Such receipts are generally distinct from arnona and grants and can vary with the services provided, local demand and applicable legal rules. Revenue from development-related activity may also be relevant to particular authorities or projects, but it is not interchangeable with stable recurring operating income. A distinction between recurring and one-off receipts is important when assessing whether a municipality can sustain regular services over time.^[3]

Budgets, accounts and oversight

Local authorities prepare budgets for their operations and are subject to financial and administrative requirements. The Ministry of Interior has a central role in the local-government system, while the State Comptroller audits authority conduct and reports on financial management and service delivery.^[1][2] The system is described by the State Comptroller as highly centralized in the relationship between central and local government, particularly in financial matters.^[5]

The legal framework also provides for differentiated oversight in certain circumstances. Under an amendment to the Municipalities Ordinance, authorities meeting prescribed financial and management conditions may be declared financially sound. According to the State Comptroller, such a declaration can exempt an authority from some approval requirements that ordinarily apply to matters such as budget allocation, concessions, land transactions, debt write-offs and certain employment arrangements. The status also affects eligibility for some grants.^[5] The rules thus combine incentives for sound financial management with continuing central supervision.

Deficits, recovery plans and financial distress

An authority whose spending and liabilities exceed its available resources may accumulate deficits or require corrective measures. Recovery plans are one mechanism used to address financial problems. The State Comptroller reported that 71 authorities operated under recovery plans during 2011–2020. Its 2023 report also found that four audited authorities had failed to meet a number of requirements and milestones under their plans; the report connected those failures to not receiving specified loans and grants and described continued accumulated deficits.^[1]

These cases illustrate that transfers and borrowing do not by themselves ensure financial balance. Results also depend on revenue collection, expenditure control, plan implementation and the authority’s economic and administrative circumstances. The State Comptroller’s findings concern the audited period and authorities and should not be generalized as a description of every local authority.^[1]

Borrowing and capital investment

Borrowing can help finance infrastructure and other capital needs, but it is distinct from ordinary operating revenue and is subject to oversight. Recovery-plan reporting shows that loans may form part of financial arrangements for authorities, sometimes alongside grants and milestones.^[1] More broadly, central supervision and statutory requirements shape the financial autonomy of local authorities, including their ability to undertake certain transactions.^[5]

Capital budgets and regular operating budgets serve different purposes. Infrastructure investment may require large expenditures whose benefits extend over time, whereas salaries, routine maintenance and everyday services create recurring obligations. Sound financial analysis therefore considers not only the size of available funds but also their permitted use, timing, repayment terms and effect on future budgets.^[3][5]

Distributional and policy issues

The design of local finance raises questions about the distribution of resources among areas. Authorities differ in their property-tax bases and their ability to collect revenue, while residents’ needs and the costs of service provision also vary. Balancing grants are one tool for addressing these differences, and arnona rules and relief policies affect both municipal revenue and household costs.^[3][4]

A further issue is the relationship between local discretion and national policy. Local authorities deliver services and administer some centrally framed programs, but central rules influence taxation, grants, approvals and financial monitoring. The resulting system gives local authorities meaningful responsibilities and some discretion while limiting fiscal independence in important areas.^[1][5]

Sources and interpretation

The OECD’s review provides a system-level analysis of Israeli local-government finance, including arnona and intergovernmental grants.^[3] The State Comptroller provides official descriptions of local responsibilities, financial oversight and specific audit findings.^[1][1][5] Research from the Bank of Israel and Taub Center adds analysis of arnona relief and local provision of welfare and education services.^[4][6] Figures and findings reported in these publications are tied to their stated reference periods; they should not be treated as current budget totals unless separately updated.