According to the International Monetary Fund (IMF), in its annual report on Israel, “The Israeli economy has weathered the global crisis remarkably well, but growth momentum is slowing: exports, at 40% of GDP, have been under pressure, reflecting weakness in the global economy and a sharp appreciation of the shekel.” According to the report, Israel’s economy will grow by only 3.4% in 2014, similar to the past two years, alongside a significant drop in the rate of growth of private consumption to a mere 3.2%,and a slight rise in unemployment compared with last year (from 6.4% to 6.7%).
The report notes that the economy is dealing with significant challenges, such as the high risk in the real estate market and a high fiscal deficit, despite the impressive reduction that has been made in it. The IMF also warns that without a solution to the large gaps in employment and productivity, particularly between secular Jews, and haredim (ultra-orthodox Jews) and Arabs, the economy’s long-run growth potential is expected to be undermined.
The IMF also calls upon the Bank of Israel to react swiftly to any change in the economic environment. In the event of positive developments, in the Israeli economy or in the global economy, the IMF recommends that the Bank of Israel should begin a process of “normalization”: raising interest rates and ending foreign currency purchases.
Regarding fiscal policy, the IMF believes that the situation has improved, and even looks better than expected, but further adjustments (budget cuts or raising taxes) will be necessary already next year, in other words, within the framework of the 2015 budget, which will start to be put together in the coming months. The report states that unpleasant surprises could arise already in 2014, due to changes in the price of housing, or pressure to increase the defense budget, and that it is therefore important to adhere to fiscal rules (debt target and spending limit). However, the IMF notes that if growth is below 3%, automatic stabilizers should be allowed to take effect, in other words, allow the deficit to be slightly above the 3% target.
Regarding the necessary adjustments for 2015, the IMF recommends not reducing budgets aimed at raising productivity and closing social gaps - such as education, professional training, and infrastructures. Alongside this, the IMF recommends that the government should refrain from multi-year obligations without coverage, and should establish budgetary “cushions,” in case of unforeseen events. On the revenue side, the IMF recommends broadening the tax base through cancelling tax exemptions, particularly on kranot hishtalmut (short term employee savings plans), imposing VAT on fruits and vegetables, and on tourism and consumer goods in Eilat. The IMF advises against further increasing income tax rates, and recommends continuing to raise VAT rates, and imposing taxes that reduce negative external effects (pollution tax, traffic congestion tax) and inequality (raising property purchase tax).
The IMF recommends appointing Governor of the Bank of Israel Dr. Karnit Flug rathe than Minister of Finance Yair Lapid to head the Financial Security Committee, the body that oversees the financial stability of the economy and comprises all the regulators (the Bank of Israel, the Ministry of Finance, and the Israel Securities Authority). The report claims that the Ministry of Finance expressed unequivocal objections to the possibility of Dr. Karnit Flug heading the committee, and stated their opinion that the Finance Minister should lead the committee, given his responsibility for the stability of the economy as a whole.
A chapter of the report is dedicated specifically to structural reforms. The chapter points out the urgency of improving the business environment in Israel by reducing bureaucracy and reducing poverty in Israel, which is growing at one of the highest rates among the OECD countries.
Published by Globes [online], Israel business news - www.globes-online.com - on February 13, 2014
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