Benjamin Netanyahu's period as prime minister was the longest in Israel's short history. It began in 2009, after the subprime crisis, at a point at which the Israeli economy benefited from a supportive global environment, and after which the economy grew faster than those of other developed countries. The gas reservoirs discovered off the coast of Israel engendered optimism about the future.
Were it not for the coronavirus pandemic, it could have been said that Netanyahu was giving back another country from the one he took into his care twelve years ago. Some of the economic measures examined in this article indicate fine achievements: in the past decade, pay has risen in real terms, as has per capita GDP, unemployment reached record lows, and the government debt:GDP ratio was also historically low, so that the economy met the coronavirus crisis in a good position, which helped in mitigating the damage.
On one issue, however, housing prices, Netanyahu failed utterly. And there are other question marks: according to the OECD, Israel after the Netanyahu era needs far-reaching reforms in transport, infrastructure, energy, education, and in encouragement of productivity. These will be problems for Netanyahu's successor. In order for the economy to grow faster, there needs to be longer term thinking about how to finance reforms and how to raise labor productivity in Israel.
The question is, what are the expectations? Does Israel aspire to be a top-of-the-class genius, or the average kid who has a good time.
The debt: A decade of achievement, and then came the pandemic
The national debt at the end of Netanyahu's term is similar to what it was at the start. This is entirely because of the coronavirus pandemic, which in a single year wiped out Netanyahu's achievement in reducing debt. Looking back, thanks to tight fiscal discipline, government debt was reduced from 91.3% of GDP when Netanyahu was minister of finance in 2003 to 71% in 2008. The Bank of Israel says that the decline in the effective interest rate on government debt, combined with rapid growth in GDP in nominal terms since 2010, contributed to a continuing decline on the debt:GDP ratio, but their cumulative effect between 2010 and 2019 explains only half of the drop in the ratio.
The remainder of the decline in the debt:GDP ratio was mainly attributable to extra-budgetary capital receipts, marking-to-market of the foreign currency debt, and the slowdown in inflation. On the eve of the coronavirus pandemic, the debt:GDP ratio was down to 60%. But the measures needed to help the economy deal with the crisis raised the ratio to 73%, thereby wiping out a decade of decline. According to the Bank of Israel, the government's ability to implement an expansionary fiscal policy without running the risk of a debt crisis had grown since 2003, thanks to the reduction in the ratio. This made it easier to cope with the economic effects of the coronavirus pandemic and with the need to increase government investment in infrastructure to close the gap with the developed countries. The main problem is the structural deficit, reducing which will require a credible multi-year plan.
Pay: A sharp rise, but it's complicated
What happened to wages under Netanyahu? Since 2010, real wages in Israel have been rising, a trend that sharpened after 2015, and, in total, wages in real terms, adjusted for inflation, rose 26% during his term.
The real rise in wages was made possible by several factors, among them a high growth rate, the sharp increase in the minimum wage, low unemployment, and low inflation, which kept the real rate of increase high.
The growth in wages was in both the private and public sectors. Between 2010 and 2019, wages in the private sector rose by an average annual rate of 2.2%. The peak came in 2015-2018, when real wages rose at annual rate of 3%. But there's a catch. The average rise in real wages does not reflect those left behind, and is strongly affected by the rise in the numbers of workers in the technology industry, who pulled the figures upwards. Last April, the pay of a technology worker was 2.3 times the national average.
In 2020, it was people on low wages who were worst affected by the coronavirus pandemic and were laid off in large numbers, resulting in a sharp technical rise in the average wage.
Low unemployment, but furlough spoils the picture
Netanyahu's policy measures as minister of finance, which included a cut in child allowances, a cut in income supplement, negative income tax, and raising the retirement age, made their contribution to the labor market and to reducing unemployment to minimal levels.
Netanyahu's anti-welfare policies as minister of finance led to a significant leap in employment among Arabs and haredim (ultra-Orthodox Jews) as well. What helped the unemployment rate to fall was the change in the figures for haredi men and Arab women, groups characterized by low participation in the workforce and a lack of qualifications relevant to today's labor market.
The rise in employment is also attributable to the technology sector. Although the sector employs only 10% of the workforce, its expansion has an effect on other sectors.
Despite the consequences of the coronavirus pandemic, according to the Central Bureau of Statistics, the narrow measure of unemployment (the number of people unemployed as a proportion of the workforce) fell to 5% in May this year. But what of the workers placed on unpaid leave and workers whose workplace closed down? The Central Bureau of Statistics excludes them from the standard measure, but they number 130,000 people who have no work to go back to. Labor market experts estimate that as soon as they start actively looking for work, when the period of unpaid leave ends, this will translate into a rise in the unemployment rate.
Housing: A resounding failure
"I told you to buy homes - buy homes. Not just in Beersheva. Buy homes in Dimona, in Yeruham, buy homes. There are those who listened and acted, and there are those who didn’t." This recommendation by Netanyahu in 2016 remains valid, unfortunately for young couples.
There is no doubt that Netanyahu's great failure in the economic sphere in his second term as prime minister was his inability, for all the welter of programs that he introduced, to halt the galloping increase in the cost of housing. The failure to close the gap between homes coming onto the market and demand led to a doubling of home prices in the past decade.
A study by the Bank of Israel published last week also shows that housing is overpriced because of inadequate supply, and that monetary policy (very low interest rates) is only a secondary factor in causing the price rises. According to the IDC Herzliya Aaron Institute for Economic Policy, the supply of housing under construction and the housing stock are the most significant variables determining prices in the housing market.
The gap between supply and demand has narrowed in the past few years. Still, according to analysis by Bank Leumi, basic demand for homes is 55,000 annually, while construction is at the rate of 50,000 housing units annually. That being the case, the lag in building completions behind demand indicates that prices will continue to rise.
GDP per capita: Up substantially, but the gap versus the OECD remains
The economic growth rates at the start of Netanyahu's second period in office were high. But in order to get close to the standard of living of the developed Western countries, GDP per capita in the Israeli economy had to grow faster. In March 2009, at the start of Netanyahu's second term, annual GDP per capita in Israel was $27,512. In 2020 it reached $40,731. That's a pretty impressive rise, but the gap versus the other OECD countries did not become narrower, because the annual rate of population increase in Israel is significantly higher than the average in these countries (2% versus 0.55).
Excluding the coronavirus year, which was exceptional in every respect, in Israel and globally, GDP per capita in Israel rose by an average of 1.5% a year, which compares with 1.2% in the US and 0.9% in Germany. Our situation is less impressive in comparison with countries like Taiwan, Singapore and South Korea, where the rate of growth in GDP per capita was 3%.
So GDP per capita did rise substantially under Netanyahu, but the question is to whom should we compare ourselves? Which brings us back to what kind of student we want to be - the top-of-the-class genius, or the average kid who has a good time.
Published by Globes, Israel business news - en.globes.co.il - on June 15, 2021
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