The Role of the Clearance Crisis on Public Expenditure and Budget Deficit in Palestine

Abstract

This study aims to analyze the effect of the clearance tax on the level of public debt and the deficit of the balance of payment in Palestine for the years1996-2019. Data was collected from the Palestinian Monetary Authority and the Ministry of Finance. The study applies the ordinary least square to test the effect of the clearance tax on the public expenditures (current and budgeted) from one side and on the balance of payment from the other side. Findings show that current expenditures and budget deficit are positively associated with the clearance tax while budgeted expenditures are not correlated with the reported tax. The study stresses on the importance to restructure the economic agreements with Israel, more specifically the Paris Economic Protocol. The study concludes with important recommendations. Palestinian authorities and relevant policymakers should reinforce their strategies to improve the tax system and the efficiency of tax collection. They should diversify their revenues, rationalize their spending, and undertake new projects to reduce the public debt level.