OECD Economic Surveys Israel OVERVIEW http://www.oecd.org/economy/israel-economic-snapshot/ 2020 Israel This document, as well as any data and any map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. 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Requests for permission to photocopy portions of this material for public or commercial use shall be addressed directly to the Copyright Clearance Center (CCC) at [email protected] or the Centre français d’exploitation du droit de copie (CFC) at [email protected] of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. 3 Executive Summary OECD ECONOMIC SURVEYS: ISRAEL 2020 © OECD 2020 4 The economy is facing a deep shock The recovery will be slow (Table 1, Figure 2). The economy started to reopen in late-April. However, The coronavirus pandemic has had profound a second lockdown in September, high uncertainty, effects. Lockdown measures and high uncertainty unemployment and new distancing regulations will have led to a sharp contraction in output. Large weigh on the recovery of consumer demand and numbers of workers have been put on leave, business investment. Weak global demand will unwinding some of the employment gains of the hold back export growth. past. The downturn hit at a time when the economy was performing well, with GDP growth close to Table 1. Output will only recover gradually potential, record-low unemployment, and relatively low public debt. However, the crisis threatens to 2019 2020 2021 aggravate Israel’s underlying challenges of high Gross domestic product 3.4 -6.0 2.9 poverty, large income gaps and wide productivity Unemployment rate¹ 3.8 6.1 6.5 disparity between its vibrant high-tech sector and Fiscal balance (% of GDP) -3.9 -13.8 -10.3 lagging sheltered sectors. Public debt (gross, % of GDP) 60.0 77.0 84.7 1. Narrowly defined according to the Labour Force Survey Confinement measures were introduced swiftly Source: OECD Economic Outlook: Statistics and Projections and, together with additional steps to strengthen database. the health care system capacity, helped limit the number of new infections during the first wave of Figure 2. The second virus outbreak will delay the pandemic. However, a second outbreak, after the recovery the economy had largely reopened, has been more Real GDP s.a., index 2019Q4 = 100 difficult to contain. The government and central 102 bank put in place wide-ranging measures to protect 100 people and firms from the economic consequences of the shutdowns. 98 The labour market has suffered a severe shock. 96 As businesses were shut down, more than a million workers have been temporarily laid-off (Figure 1). 94 Many have regained employment as the economy 92 reopened, supported by government subsidies to rehire workers. However, the severity of the shock 90 and possible restructuring of the economy will leave many looking for jobs. Government policies 88 2019 2020 2021 to retrain workers and support job search will be crucial. Source: OECD Economic Outlook: Statistics and Projections database. Figure 1. The labour market has weakened StatLink 2 https://doi.org/10.1787/888934152134 substantially % of labour force Monetary policy reacted decisively. Quantitative 45 easing was started, the policy rate lowered from Not in labour force due to reasons related to the pandemic¹ 40 0.25%-0.1%, liquidity provided, and a credit facility Employed persons temporarily absent from work due to the pandemic 35 for SMEs via banks established. If financial Unemployment conditions were to tighten, the existing 30 programmes could be further expanded. Inflation 25 will likely continue to undershoot the target range in 20 the near-term. 15 The banking system entered the crisis in a 10 robust state, and thanks to regulatory and 5 monetary easing as well as government loan 0 guarantees the initial impact on credit supply was Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 limited. Nonetheless the quality of bank balance sheets may deteriorate quickly as liquidity support 1. Data not available before May 2020. is withdrawn and firm failures increase. The banks’ Source: Israel Central Bureau of Statistics. StatLink 2 https://doi.org/10.1787/888934152115 heavy exposure to the real estate sector is another risk. Creating a deposit insurance system and a bank resolution framework could further enhance financial stability. OECD ECONOMIC SURVEYS: ISRAEL 2020 © OECD 2020 5 Tax reform can alleviate fiscal The business tax system provides large challenges and support more inclusive benefits to internationally competitive and high-tech firms. This preferential treatment should growth be reviewed with a view to better targeting the Fiscal policy responded forcefully to the crisis scheme to ensure net benefits to society and and provided welcome support to the most reduced distortions. Better targeting could create vulnerable people and struggling firms. Fiscal room for broader business and innovation support support should be maintained and targeted to that underpins the economy more widely. strengthen the recovery. The resulting substantial Excise taxes should be adjusted in line with budget deficits will add to the debt stock. environmental goals. Introducing congestion Additional social and infrastructure spending charging would reduce traffic flows and pollution, may be needed to enhance the authorities’ and would prepare Israel for the planned phase-out capacity to tackle large socio-economic disparities, of petrol- and diesel-fired cars starting in 2030. boost productivity and support the recovery of Gradually increasing taxes on gas and coal or aggregate demand. Allowing for this spending introducing an economy-wide carbon tax would while maintaining budget control, will require lower CO2 emissions in a cost-minimising way and improved spending efficiency and sustainable protect the tax base as energy generation and use increases in tax revenues. shift to natural gas. The tax mix is reasonably growth- and Reducing income disparities between employment-friendly but there is scope to municipalities will strengthen social improve the efficiency and equity of the tax cohesion system. The tax burden on labour is relatively low, Income inequalities between municipalities are and the corporate income tax rate has been cut in among the highest in the OECD, despite Israel recent years, while taxes on consumption, which being one of the smallest OECD countries. Poverty are less distortive, are relied on more heavily. rates vary significantly between different areas Nevertheless, ample room exists to simplify the tax (Figure 4), as ethnic and religious groups with weak system by abolishing inefficient tax expenditures labour market outcomes are concentrated in and broadening tax bases. separate cities or neighbourhoods. The share of the working poor is high (Figure 3). Figure 4. Poverty rates differ significantly Israel’s earned income tax credit is an effective redistribution measure with positive employment across districts Poverty rate¹, 2018, % effects for low-skilled workers. Further expanding 40 the programme would support the poor while maintaining strong incentives to work. 35 Figure 3. The number of working poor is high 30 Share of workers in poverty, per cent, 2017 25 16 20 14 15 12 10 10 5 8 0 Centre Tel Aviv Haifa North South Jerusalem 6 1. Poverty threshold is 50 % of the national median equivalised 4 disposable income. 2 Source: National Insurance Institute (2019). StatLink 2 https://doi.org/10.1787/888934152172 0 The quality of schools and the attractiveness of IRL ITA FIN ISR JPN EST NLD FRA ESP AUS USA DNK DEU CAN GBR KOR MEX NOR SWE the local labour market differ considerably Note: Workers with income below the poverty line, living in between municipalities. Increasing the quality of households with a working-age head and at least one worker. 2018 education by moderating the differences between data for Australia and Israel. the various school streams would improve the Source: OECD Income Distribution database. employability of the labour force. The core subjects StatLink 2 https://doi.org/10.1787/888934152153 should be strengthened in the curriculum of the OECD ECONOMIC SURVEYS: ISRAEL 2020 © OECD 2020 6 Haredi stream. Post-secondary vocational and fostering competition and regulatory reform in programmes should be expanded to target those sheltered sectors. adults who left school without proper skills. Despite progress, regulations in a number of Improving public transportation and areas are more restrictive than in other OECD coordination between central government and countries. For instance, price regulations