Israel

   

Economic Policies

#11
Key Findings
Showing steady economic growth, Israel receives comparatively high rankings (rank 11) in the area of economic policies. Its score on this measure has improved by 0.3 points relative to 2014.

Growth rates are robust if declining slightly, with 3.5% growth expected for 2017, and 3.3% in 2018. Inflation has risen to a marginally positive level after several years of negative figures. Budget deficits are on the decline, reaching moderate levels. A new capital authority oversees the financial sector.

Unemployment rates are low, with the economy hovering near full employment. Programs support the labor-market integration of ultra-Orthodox communities, but employment rates among men here remain comparatively low. The cost of living is high, with housing and rental prices showing clear increases in recent years.

Taxation policy is deliberately somewhat regressive, involving VAT and an income tax that applies disproportionately high rates to middle-income earners. Research and development funding is extraordinarily strong, and a new Innovation Authority began work in early 2017.

Economy

#26

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
In general, while Israel’s economic policy has some shortcomings, it is fundamentally strong. It largely provides for a reliable economic environment, renders the country internationally competitive and ensures it remains attractive as a location for economic activity.

According to the OECD, Israel’s economy is expected to grow by 3.5% in 2018 and 3.3% in 2019. Economic results in 2017 were generally good, but not as strong as in 2016. The economic growth rate of 3% in 2017 was down by 1 percentage point from 2016’s 4% growth rate. The inflation rate in 2017 was 0.4%, up from the negative inflation of 2014 – 2016. In addition, the general employment rate of 77% in July 2017 (among the population aged 25 to 64) remains one of the highest in the western world. The budget deficit has declined in recent years, from 3.9% in 2012 to 2.2% in 2017. While Israel’s growth rates have improved over the last decade, productivity performance has been weak. As the OECD economy survey states, “highly dynamic tradable goods industries coexist with an inefficient sheltered sector to an unusual extent, dragging down overall economic performance.” Product-market regulation and competition, particularly in the food, banking and electricity sectors, has undermined economic productivity.

In addition, poverty rates are still high, especially among the elderly. Income inequality ratios are also high. According to recent data, 1,809,000 people in 463,000 families were living in poverty in 2016, including 842,300 children. Although the incidence of poverty declined from 19.1% in 2015 to 18.6% in 2016, Israel has the highest poverty rate within the OECD. The cost of living also remains high, particularly for housing. Housing and rental prices have clearly increased in recent years, although the rate of growth declined in 2017. This trend mostly affects the middle and lower classes, and was one of the main causes of the 2011 social-justice protest.

Citations:
Amit, Hagai, “Israel’s Unemployment Rate Falls to Lowest Rate in Decades,” Haaretz, 21.8.2017: https://www.haaretz.com/israel-news/business/1.808252
Arlosoroff, Meirav, “Israel May Raise 2019 Budget Deficit to 2.9%,” Haaretz, 23.11.2017: https://www.haaretz.com/israel-news/1.824538
Barkat, Amiram, “Israel’s poverty remains worst in OECD,” Globes, 6.12.2017: http://www.globes.co.il/en/article-israels-poverty-remains-worst-in-oecd-1001214592
“Economic Survey of Israel 2016.,” OECD Website. http://www.oecd.org/eco/surveys/economic-survey-israel.htm
“Israel central bank to keep key interest at 0.1% as inflation tame: Reuters poll,” Reuters, 23.11.2017: https://www.reuters.com/article/us-israel-cenbank-rates/israel-central-bank-to-keep-key-interest-at-0-1-percent-as-inflation-tame-reuters-poll-idUSKBN1DN1CZ
Klein, Zeev, “OECD: Israeli economy will grow 3.4% in each of next two years,” Israel Hayom, 29.11.2017: http://www.israelhayom.com/2017/11/29/oecd-israeli-economy-will-grow-3-4-in-each-of-next-two-years/
Milman, O. and Zinger, R., “2015 budget: A high deficit and no growth engines,” Calcalist website, 28.9.2014: http://www.calcalist.co.il/local/articles/0,7340,L-3641611,00.html (Hebrew).
Yeshayahou, Kobi, 2017, “Merrill Lynch sees weaker shekel in 2018,” Globes, 6.12.2017: http://www.globes.co.il/en/article-merrill-lynch-sees-weaker-shekel-in-2018-1001214643
The Marker and Israel Fisher, “Israel’s GDP Growth to Exceed 3% in 2019, OECD Says,” Haaretz, 29.11.2017: https://www.haaretz.com/israel-news/business/1.825553

Inflation over the past year December, 2016 to December, 2017, Bank of Israel website, http://www.boi.org.il/en/MonetaryPolicy/Data/Pages/Default.aspx

Barkat, Amiram, “Israel’s economy grew 3% in 2017,” Globes, 31.12.2017, http://www.globes.co.il/en/article-israels-economy-grew-3-in-2017-1001217569

Labor Markets

#17

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
Labor-market indicators continue to be strong. The economy is hovering around full employment, with the December 2017 unemployment rate (among people aged 25 to 64) at 3.6%.

Israel’s labor policy focuses on providing incentives for both members of two-adult households to work, and on expanding job-training services for low-skilled workers. The government has recently reformed the “earning potential” scale used for purposes such as calculating taxes and day care subsidies; increased funding for working mothers and labor-training programs; and introduced a negative tax for low-income workers. However, the OECD maintains that implementation of policies in this area is slow and underfunded. The Ministry of Economy is promoting programs to encourage and assist members of ultra-Orthodox communities to obtain academic educations, which will help them fit into modern workplaces. Currently, while 70% of ultra-Orthodox women take part in the labor force, only 51% of the community’s men are employed. This latter figure represents a decline after a decade of continuous increase, from 40% in 2003 to 54% in 2014.

Israeli government largely supports the free market, and its labor-protection laws are seen by the OECD as reasonably flexible. The government has adopted the Danish “flexicurity model” of labor-market regulation. Based on trilateral agreements between the government, employers and unions, this aims to improve the economic status of both unionized workers and the unemployed by ensuring that workers receive severance packages and unemployment benefits when they lose jobs, while still allowing employers considerable hiring-and-firing flexibility. In 2014, an agreement was struck between the Histadrut Labor Federation and business leaders on a plan to increase the monthly minimum wage. In November 2015, the parties to the agreement approved another increase, and by December 2017 the minimum wage had increased to ILS 5,300 – ILS 1,000 more than in 2014.

After years of increase in the number of foreign workers in Israel, especially in the nursing, agriculture and construction sectors, the government sought to slow the flow of foreign workers. These efforts began to bear fruit, but given the need for more construction to address Israel’s housing crisis, Israel has again changed this policy, and the number of foreign workers is again on the rise – from 71,281 legal foreign workers in December 2013 to 84,485 in December 2016. Lately, in April 2017, Israel signed a deal to bring in 6,000 Chinese construction workers, but only 2,500 workers arrived by May 2017.

In January 2017, the government approved a National Plan for Expanding the Skilled Workforce for the High-Tech Industry. The plan’s aim is to provide a solution for the estimated shortage of 10,000 high-tech workers in Israel. One of the action points is to attract foreign nationals to the program in 2018.

Citations:
Amit, Hagai, “Israel’s Unemployment Rate Falls to Lowest Rate in Decades,” Haaretz, 21.8.2017: https://www.haaretz.com/israel-news/business/1.808252
“Foreigners in Israel Data,” Administration of Border Crossings, Population and Immigration report, 4/2016 (Hebrew): https://www.gov.il/BlobFolder/reports/foreigners_in_israel_data_2016/he/foreigners_in_Israel_data_2016.pdf
Levin, Elazar, “Only 2,500 Chinese Workers Arrived in Israel”, Arutz Sheva, 29.5.2018 (Hebrew): http://www.news1.co.il/Archive/001-D-402871-00.html
Globes correspondent, “Bank of Israel keeps rate at historic low,” Globes, 27.11.2017: http://www.globes.co.il/en/article-bank-of-israel-keeps-rate-at-historic-low-1001213442
Toi Staff and AFP, “Israel signs deal to bring Chinese laborers, but they won’t work in West Bank,” Times of Israel, 23.4.2017: https://www.timesofisrael.com/israel-signs-deal-to-bring-chinese-construction-workers-but-they-wont-work-in-west-bank/
Weissberg, Hila, “Why has the number of ultra-Orthodox men employees been halted?,” Israeli Broadcasting Corporation, 26.9.2017 (Hebrew): http://www.kan.org.il/Item/?itemId=23023
Workers in Israel. How Ethno-Nationalism prevents Structures of Representation. In: Journal for Societal Progress, vol 5 (2), p. 88-96. www.momentum-quarterly.org

CBS: “Labour Force Survey Data, December, 4th Quarter and Annual data of 2017,” 31.01.2018, http://www.cbs.gov.il/reader/newhodaot/hodaa_template_eng.html?hodaa=201820029

Yefet, Nati, “Israel eases entry of foreign tech experts,” 01.01.2018, http://www.globes.co.il/en/article-israel-eases-entry-of-foreign-tech-experts-1001217775

Taxes

#33

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
6
Israel taxation policy is somewhat regressive. It includes increasing indirect taxes such as VAT, which is levied equally on all products. Furthermore, although the direct income tax is progressively structured, and a large portion of the population makes too little money to pay any income tax at all, the system creates a curve that forces middle-income individuals to pay proportionately more tax than high-income individuals. This apparent distortion is an intentional economic strategy meant to induce growth by reducing the tax burden associated with investments and companies. While controversial, it is not necessarily unfair as such.

Like most other countries, Israel utilizes its tax system as a political instrument. For instance, it offers tax reductions to army veterans. In most instances the Israeli tax system has a valid rationale for tax reductions that appear to violate the principle of horizontal or vertical equality. Recently, Prime Minister Benjamin Netanyahu hinted that Israel may initiate tax cuts for the business sector, following the U.S. Senate’s landmark tax reform. However, the Bank of Israel Research Department’s director said that cuts would have little effect on economic activity.

Israel has had annual tax surpluses, relative to forecasts, for the last five years. In 2017, the tax surplus was estimated at ILS 16 billion, stemming largely from the sale of the controlling stake in Keter Plastic, the sale of Mobileye, and Israel Tax Authority collections operations that yielded more tax revenue than forecast. Although a recent OECD report advised policymakers to devote tax revenues to improving social services, the current government has advocated tax cuts. In December 2017, Finance Minister Moshe Kahlon announced the abolishment of customs and purchase taxes totaling ILS 800 million per year.

Citations:
Barket, Amiram, “BoI research chief warns against tax cuts,” Globes, 11.12.2017: http://www.globes.co.il/en/article-boi-research-chief-warns-against-tax-cuts-1001215058
Barket, Amiram, “Israel’s budget surpluses are becoming a habit,” Globes, 15.10.2017: http://www.globes.co.il/en/article-israels-budget-surpluses-are-becoming-a-habit-1001207772
Barket, Amiram, “Israel thinks it’s an open economy. It isn’t.,” Globes, 14.02.16: http://www.globes.co.il/en/article-israel-thinks-its-an-open-economy-it-isnt-1001102598

“Economic Survey of Israel 2016.,” OECD Website.http://www.oecd.org/eco/surveys/economic-survey-israel.html
Solomon, Shoshanna, “Israel cuts product tariffs in bid to lower cost of living,” The Times of Israel, 11.12.2017: https://www.timesofisrael.com/israel-cuts-product-tariffs-in-bid-to-lower-cost-of-living/
Solomon, Shoshanna, “Netanyahu hints at Israeli corporate tax cut after US slashes rate,” The Times of Israel, 3.12.2017: https://www.timesofisrael.com/netanyahu-hints-at-israeli-corporate-tax-cut-after-us-slashes-rate/

Budgets

#26

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
After the economic crises of the mid-1980s, key steps were taken to reduce Israel’s budgetary deficit and to build a set of objectives and guidelines enabling sustainable budgetary planning. Strict budgetary-discipline laws were enacted: The Budget Foundations Law set scrupulous spending procedure regulations and implemented deficit-reporting requirements, and another law prohibited the central bank from providing loans to the government, ensuring that future deficits would be financed by borrowing from the public and abroad rather than through direct monetary injections. Consequently, fiscal power was centralized, giving the Finance Ministry’s budget department the power to impose a policy of budgetary discipline.

Two crucial additional tools, the Arrangements Law (Hok Ha-Hesderim) and the Budget Deficit Reduction Law, redefined the financial and economic structure of the Israeli government. The Arrangements Law is an omnibus law passed in parallel with each budget, consisting of numerous restrictions and amendments designed to secure the state’s financial goals. Since 2009, the budget has been converted to a biennial budget plan, which many regard as having a positive influence on planning capabilities.

This history of successful budgetary reform continues to contribute to the stabilization of the Israeli economy. Along with a prudent monetary policy, these measures helped the country weather the recent global economic crisis relatively successfully.

Citations:
Hattis Rolef, Susan, Two-Year (Biennial) Budgets, The Knesset Research and Information Center, 15.7.2009: https://www.knesset.gov.il/mmm/data/pdf/me02392.pdf
“Mission Concluding Statement,” International Monetary Fund, 8.2.2017: http://www.imf.org/en/News/Articles/2017/02/08/mcs02082017-Israel-Staff-Concluding-Statement-Of-The-2017-Article-IV-Mission

Research and Innovation

#2

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
10
Israel’s research and development (R&D) sector is based on three pillars: scientific research performed primarily in academia, research conducted in government institutes, and research conducted by civil-industrial partnerships overseen the by Finance Ministry. For many years, Israel has led the world in research and development (R&D) investment, spending more on R&D as share of GDP than any other developed country. The country was ranked at 16th place in the 2017 Global Innovation Index.

In 2014 the government’s social-economic cabinet approved the establishment of an authority aimed to encourage technological innovation. Since the beginning of 2016, the Ministry of Economy and Industry has provided financial support to private companies through a fund focused on such innovation. The fund prioritizes research in developing areas in Israel, as well as in the field of biotechnology.

The Israel Innovation Authority began its activity in early 2017. The Authority was established based on the model of the Office of the Chief Scientist in the Israeli Ministry of Economy and Industry, with the goal of implementing the R&D Law and providing high-quality and effective services for the Israeli innovation ecosystem.

A large portion of Israel’s R&D policy is directed toward international cooperation. In 2011, Israel was engaged in 30 different international cooperative research ventures with a variety of European countries and organizations. These resulted in 250 grant applications and projects with a total budget of €250 million. Israel is also signatory to some 29 bilateral R&D agreements and is involved in five EU programs, including Eureka, Eurostars, the Competitive and Innovation Program – Enterprise Europe Network (CIP-EEN), Galileo and Sesar. In terms of both policy and budgets, the most significant international involvement is through the Framework Programs, such as Horizon 2020, which are managed by the Israel-Europe R&D Directorate (ISERD).

Israel produces a high number of new and important patents every year, mainly in the fields of science and technology. It is a signatory to the Patent Cooperation Treaty. In 2016, an increase of 25% in patent applications was recorded – from 509 in 2015 to 635 in 2015. In addition, the number of patents approved rose from 540 in 2015 to 813 in 2016.

Citations:
Cocco, Federica, “How Israel is leading the world in R&D investment,” Financial Times, 8.2.2017: https://www.ft.com/content/546af0b2-ede5-11e6-930f-061b01e23655
Siegel, Judy, “Israeli patent applications rose 25% in 2016,” The Jerusalem Post, 4.9.2017: http://www.jpost.com/Israel-News/Israeli-patent-applications-rose-25-percent-in-2016-504146
“The CEO of the social-economic cabinet approved the establishment of an authority for technological innovation,” Minister of the Economy website 15.9.2014: http://economy.gov.il/Publications/PressReleases/Pages/CabinetForTechnologicalIn novation.aspx (Hebrew)
The R&D fund – Support to Research and Technological Innovations,,” The Ministry of Economy and Industry website (Hebrew)
Robin, Aliran, “The Budget of the Israel Innovation Authority will be cut in 100 Million Shekels,” The Marker, 11.8.16: (Hebrew) http://www.themarker.com/technation/1.3036681 “2016 Israel Innovation Authority Report Presented to Prime Minister,” 29.6.2016: http://www.imra.org.il/story.php3?id=70918

Israel Innovation Authority, “Report 2017,” http://economy.gov.il/English/NewsRoom/PressReleases/Documents/2017IsraelInnovationAuthorityReport.pdf

Dutta, Soumitra, Bruno Lanvin, and Sacha Wunsch-Vincent (Editors), “The Global Innovation Index 2017. Innovation Feeding the World,” https://www.globalinnovationindex.org/gii-2017-report

Global Financial System

#15

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial Markets
8
During Israel’s process of OECD accession its financial regulation was assessed against a number of suitability criteria. Related reports note that Israel signed the convention on combating bribery and successfully passed the three-stages review required by the convention. It also took steps to impose criminal penalties and apply the law to transactions made by Israeli companies abroad. In accordance with OECD standards, Israel also established an authority tasked with increasing the accessibility of financial information. The authority works with corporate experts and publishes materials in Hebrew, Arabic and English. It also operates a public inquiries office for public complaints.

Israel has several regulatory institutions tasked with supervising financial markets. The most prominent include the Israel Securities Authority (ISA) and the Israel Antitrust Authority (IAA). These institutions are responsible for insuring market stability and fair competition. In the aftermath of the global financial crisis, different government organizations worked to limit the risk in the banking and insurance industry. Actions include tightening the rules on mortgages, adopting Basel III regulation and raising minimum capital ratios. Several committees have been formed to investigate structural reforms and submitted their recommendations. Both OECD and central bank assessments have been cautiously optimistic, with the latter pointing to important regulatory tools that are currently being developed for future implementation.

In 2016, following OECD recommendations, the government approved the creation of a new capital authority. The Department of Capital in the Finance Ministry has been shuttered, and a new, independent authority put in its place, although the Finance Minister still oversees this body. Among its fields of responsibility, the new authority is in charge of ensuring the stability of regulated finance institutions and making sure they fulfill their obligations to their customers.

Citations:
“Financial stability report,” Bank of Israel 2014 (Hebrew). “Israel – Economic forecast summary,” November 2014. http://www.oecd.org/economy/israel-economic-forecast-summary.htm.
Sasson, Asa, “The government approved the creation of the new finance authority,” The Marker 13.03.2016. http://www.themarker.com/markets/1.2881163
Back to Top