"Output growth is strong by industrial country standards. It rose by 0.8% in 2009, and is set to grow around 4% in 2010. And unemployment is already back down to around 6%, close to its historic low. This reflects good preparation and a firm policy response," says the IMF in its concluding statement of the Article IV Mission to Israel, released by the Bank of Israel and the Ministry of Finance today.
The IMF cautions that the Israeli economy faces a number of challenges. "With inflation expectations elevated, emerging strains on capacity, and a high public debt ratio, policy tightening is needed. But this should be done in a way that minimizes the impact on competitiveness, given that capital inflows are expected to persist as long as low growth induces capital outflows from advanced countries."
The IMF also warns, "A mix of expenditure and tax actions is recommended. The latitude under the budget operation mechanisms to hold spending below budgeted authorization - including by retention of all the various reserves in the budgetshould be applied. But if this greater-than-planned structural consolidation is to be secured, risks on the revenue side - arising from generous official estimates -may also need to be addressed. With discretionary spending restraint already assigned to strengthen the deficit, action may be needed on indirect taxes."
The IMF also warns about the real estate market. "Steps to cool the housing market may be required. The pace of house price inflation cannot continue without risk of broader instability - notably in the banking sector. Given uncertainty about when stabilization will occur, prompt measures to check the momentum of prices should focus on actions needed anyway to establish a healthy housing sector for the long run. Building on such measures already taken, this focus will also be to the particular benefit of young home buyers. Possible measures include further relaxation of land supply and licensing constraints, and reduced exemptions in the taxation of capital gains on housing and rental income to establish level playing fields in both areas."
The IMF welcomes the establishment of the Sheshinski committee. "A review of the taxes on non-renewable resources - notably natural gas - and arrangements for spending of the proceeds is appropriate. Thus, the establishment by the Ministry of Finance of a commission to review the current tax arrangement is most welcome. Its general intention to raise the “tax take” from these activities to advanced country norms is fully appropriate; in part as a fair tax system is also more likely to be stable."
The IMF advises not to use gas receipts for current spending. "We encourage other reforms to adopt international best practice in this area, including appropriate pricing arrangements in the tax and to secure appropriate intergenerational distribution of the proceeds. Accordingly, the first use of such tax receipts should be to reduce public debt, given that overall revenues will be modest on current estimates of the volumes of gas. But if large additional finds are made, revenues should be placed in a sovereign wealth fund."
The IMF again harshly criticized Governor of the Bank of Israel Prof. Stanley Fischer for his dollar purchasing policy over the past two years. "Further foreign exchange intervention on both sides could help to sustain orderly market conditions. But given that reserves and central bank sterilization losses are already considerable, and that persistent one-sided use of this instrument undermines the credibility of the floating exchange rate regime, it is ill-suited as the main means of reconciling inflation and competitiveness objectives."
Published by Globes [online], Israel business news - www.globes-online.com - on November 29, 2010
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