"The economy is in a very good position, but at the same time we see grey clouds in the background," Governor of the Bank of Israel Amir Yaron said at the press conference to present the Bank of Israel's Annual Report for 2018. "2018 was a good year." Yaron said. "The economy grew by more than the average growth rate in the developed countries, growth was balanced, and the fear of a weakening in private consumption did not materialize. The situation in the labor market is good, real wages rose, mainly because of the private sector." Yaron did however point out that growth per capita was low.
And indeed, according to the report, wages rose, unemployment fell to a low point, housing prices stopped rising, inequality narrowed, and the rate of poverty fell. But alongside the praises and the positive figures - ammunition for Minister of Finance Moshe Kahlon's election campaign - the Bank of Israel also criticizes the finance minister's policy, which financed growth in government spending through expanding the fiscal deficit, which in 2018 reached its highest level since 2013.
According to the report, the Israeli economy grew by 3.3% in 2018, which is lower than the growth rates in 2016 and 2017, but is still in line with the economy's growth potential. GDP per capita grew by 1.3% - but despite the growth, the gap in productivity (which is one of the measures of per capita product) between Israeli workers and their counterparts in the developed countries continued to widen. The productivity of a US worker grew 2.2% in 2018, and the average growth in productivity in the OECD countries was 1.8%.
The good news for Israeli families is that real income continued to grow in 2018. Since 2015, average real wages in Israel have grown at an annual rate of 2.8%. Growth in 2018 was 2.7%. The standard of living continued to rise in 2018, although the gap in standard of living between Israel and the developed countries has remained almost unchanged since 1970.
Did the rise in wages stem from greater output by Israel workers. Not exactly. According to the Bank of Israel, the main factor pushing wages higher was a shortage of workers, a conclusion backed by the record low unemployment figure of 4%.
While the Bank of Israel cites the Ministry of Finance's official figure for the fiscal deficit as a proportion of GDP of 2.9%, when the broader government activity is taken into account (National Insurance, institutions of higher education, government hospitals) and the deficit is adjusted for cyclic factors, the figure reaches 4.2%. This means that the present government will leave a problematic legacy for the next one if it needs to expand spending to extricate the economy from a recession.
Yaron stressed the concern over the growth in the structural deficit. "The stress here is not on a one-time figure. What is important is the expansion of the structural deficit. Moreover, since the economy is in good shape the deficit after discounting cyclical factors is higher and reaches 4.2%. In order to maintain the economy's robustness, the government will have to make fiscal adjustments, a mix of greater efficiency, trimming the rise in spending, and a rise in revenues from taxes."
The challenges facing the next government are greater integration of Arab women and haredi men into the workforce: the problem is particularly severe among haredi men, whose skill levels are in decline, with the gap between them and other men widening as the years go by. Another challenge is the low efficiency of Israeli bureaucracy. The Bank of Israel recommends that the government should set qualitative and quantitative goals for government workers in the framework of new labor agreements.
In education, the challenge is to improve on low achievement levels and to narrow the growing gaps between graduates of the education system. The Bank of Israel recommends increasing investment per pupil but in an efficient way, for example by providing incentives for high-quality teachers to teach in weak schools and directing more of the budget to early education for children aged 0-3.
Published by Globes, Israel business news - en.globes.co.il - on March 31, 2019
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