OECD Economic Surveys ISRAEL JANUARY 2016 OVERVIEW
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OECD Economic Surveys ISRAEL JANUARY 2016 OVERVIEW OECD Economic Surveys: Israel 2016 © OECD 2016 Executive summary ● The economy has strong fundamentals, but productivity performance has been weak ● Income inequality and poverty are high ● The fiscal framework is not conducive to inclusive growth 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. 9 © OECD 2016 1 EXECUTIVE SUMMARY The economy has strong fundamentals, but productivity performance has been weak Per capita GDP and productivity Thanks to prudent monetary, financial and fiscal Gap relative to the upper half of OECD countries¹ policies, growth has exceeded most other Per cent Per cent OECD countries’ rates for more than a decade. 0 0 Employment is rising, inflation is low, the external GDP per capita -10 GDP per hour worked -10 surplus is comfortable, and the public finances are -20 -20 in relatively good shape. However, although income per capita has gradually been catching up with the -30 -30 most advanced countries, this has not been -40 -40 matched by similar convergence in productivity. -50 -50 Indeed, highly dynamic tradable goods industries 1995 2000 2005 2010 coexist with an inefficient sheltered sector to an unusual extent, dragging down overall economic 1. Percentage gap with respect to the simple average of the highest 17 OECD countries (in constant 2010 PPPs). performance. Substantial deficiencies in product Source: OECD, National Accounts and Productivity Databases. market regulation and competition, especially in 1 2 http://dx.doi.org/10.1787/888933317834 the entire food chain, banking and electricity, are weakening productivity and reducing incomes. Income inequality and poverty are high Poverty rate relative to threshold of 50% of Israel is also characterised by high poverty and large median disposable income gaps along many material and non-material Per cent Per cent dimensions of well-being. Poverty is especially high 20 20 2013 or latest year available among the elderly, in part because of low basic 16 16 pensions. Employment rates for Ultra-Orthodox 12 12 (Haredi) men and Arab-Israeli women remain low. Rising housing prices impose an additional 8 8 affordability burden, increasingly even on the 4 4 middle class. Relatively high price levels due to 0 0 weak competition, in particular in the food sector, ITA IRL ISR NZL BEL PRT ESP CZE NLD FRA SVK AUT AUS USA SVN DNK CAN DEU KOR GBR MEX GRC impose a greater cost, in terms of living standards, Source: OECD Income Distribution Database. to socioeconomically disadvantaged groups. 1 2 http://dx.doi.org/10.1787/888933317567 The fiscal framework is not conducive to inclusive growth Expenditure on educational institutions The tax burden and public civil spending are low Per student, relative to GDP per capita and income redistribution is limited. Despite Per cent Per cent substantial increases in recent years, education 28 28 spending per student remains low relative to per 2013¹ 26 2011 26 capita income compared to most other OECD 24 24 countries. Insufficient infrastructure, especially in 22 22 transport, hampers private-sector efficiency. The 20 20 cap on spending growth in the public debt- 18 18 reduction strategy implies the share in GDP of civil 16 16 spending will shrink further over time, restricting IRL ITA ISR JPN BEL EST NLD SVK CZE ESP PRT FRA AUS USA DEU CAN KOR GBR the room to finance useful public spending 1. Or latest year available. For more details, see Figure 9, panel E. initiatives. Source: OECD (2015), Education at a Glance 2015; OECD, National Accounts Database 1 2 http://dx.doi.org/10.1787/888933317574 10 OECD ECONOMIC SURVEYS: ISRAEL © OECD 2016 2 © OECD 2016 EXECUTIVE SUMMARY MAIN FINDINGS KEY RECOMMENDATIONS Monetary policy and the fiscal framework and policy Inflation is below the official price stability Maintain the current expansionary monetary policy stance. objective. Implement further macro-prudential measures if risks to the financial system (from housing prices) rise. The cap on government spending implies further Reduce the structural deficit and pursue the gradual debt- declines as a share of GDP, even as civil spending reduction strategy by raising fiscal revenues, preferably by is very compressed. removing inefficient tax expenditures, such as the VAT exemption on fresh fruit and vegetables, and raising environmental taxes including by, for example, establishing a carbon tax. To the extent that savings can be made on military outlays and debt service and sufficient revenues raised, increase civil spending on education, infrastructure and poverty reduction. Implement effectively the envisaged plan to ensure consistency of commitments for future expenditure and tax reduction with the spending ceiling and deficit target rules. Product market reform Product market regulations are far from best Ensure that the planned reduction of the regulatory burden relies practice. on high-quality regulatory impact assessments. Food prices are high. Further cut tariffs and non-tariff barriers, in particular by adopting the EU import procedures on food and agricultural goods. Replace quotas, guaranteed prices and customs tariffs with direct payments to farmers. Consider screening the anti-competitive provisions in the food sector using the OECD competition assessment toolkit. The banking sector is concentrated and Follow through on plans to allow the entry of new competitors in inefficient. retail banking, in particular by non-banking credit entities, with appropriate prudential and consumer protection regulation. The electricity market is still dominated by a Turn the Israel Electricity Corporation into a holding company, and heavily indebted publicly owned, vertically create a separate infrastructure operator. integrated company. Competition law enforcement is not fully Expand the leniency programme, and increase financial penalties effective. for competition law violations. Create independent regulators with well-defined mandates in the telecoms, postal services and gas sectors. Inclusive growth and pension system The quality of education, especially for Haredim Increase education funding for disadvantaged groups. Develop and Israeli Arabs, is poor, and these groups are not vocational education and training more fully for young adults. well integrated into the labour market, resulting Require Haredi schools to teach mathematics, science and foreign in widespread poverty. languages. Expand the earned income tax credit and active labour market policies. Introduce a mandatory community service programme for Israelis who are currently exempted from military service. Restricted supply is raising house prices, reducing Complete the streamlining of the administrative requirements for well-being, especially for young families planning and building a home. Further develop public transport infrastructure to make it easier to live in lower-price housing areas, and promote labour market participation for those living in remote areas. The pension system has solid foundations, but To reduce elderly poverty, as the second pillar matures, seek a way the poverty rate among the elderly is high. to increase first-pillar pensions without creating work disincentives. Moderate the impact on net current income of relatively high mandatory contributions to pension savings for low-wage workers. Gradually raise women’s statutory retirement age to equal men’s. Index the retirement age to life expectancy at age 65. Require pension providers to offer low-cost pension funds as their default option, for example, by proposing passively managed (indexed) assets or streamlining distribution channels. OECD ECONOMIC SURVEYS: ISRAEL © OECD 2016 11 © OECD 2016 3 4 © OECD 2016 OECD Economic Surveys: Israel 2016 © OECD 2016 Assessment and recommendations ● The economy is resilient and has sound fundamentals ● Maintaining an expansionary monetary stance and public debt reduction remains appropriate ● Productivity-enhancing reforms to boost growth and make it more inclusive ● Well-designed reforms to promote social cohesion and share the fruits of growth ● Strengthening climate change policy 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. 13 © OECD 2016 5 ASSESSMENT AND RECOMMENDATIONS The economy is resilient and has sound fundamentals The Israeli economy is enjoying its 13th consecutive year of growth, demonstrating remarkable resilience. Increases in output, averaging nearly 4% annually since 2003, have exceeded those of most other OECD countries. The country experienced only a mild slowdown in activity in 2014, despite the Gaza conflict, and growth continued in 2015, even if at a relatively moderate pace (Figure 1, Panel A). Weaker exports and investment, partly resulting from the appreciation of the currency since 2012, have led to a slowdown in per capita GDP growth (Panel B). However, the employment rate has continued to rise steadily (Panel C), the unemployment rate has fallen to around 5¼ per cent, and the external balance is in surplus. These favourable economic outcomes are based on prudent macroeconomic policy pursued