OECD cuts Israel's 2019 growth forecast

Growth Photo: Shutterstock

The OECD lowered the 3.5% forecast for Israel's economic growth to 3.1% and warns that essential measures such as tax hikes should be introduced.

The Organization for Economic Cooperation and Development (OECD) has cut its 3.5% forecast for Israel's economic growth in 2019, which it issued in November 2018, to 3.1%, and is now forecasting 3.3% GDP growth in 2020.

The lowering of the OECD's forecast follows similar measures by the International Monetary Fund (IMF) and the Bank of Israel Research Department. OECD's new forecast was part of a broad forecast for global growth, following growing geopolitical tension and the escalating trade war between China and the US.

The lower forecast in itself is not alarming, because it is due largely to exogenous external factors, headed by the slowdown in world trade and the growing tension between the US and China and Iran. The OECD emphasizes that even after being lowered, the growth forecast for Israel is still strong and close to the economy's potential. At the same time, the hinted warnings issued to the incoming Israeli government that unpopular but essential measures must be taken, such as tax increases, cannot be ignored.

"The government has to renew its efforts at reforms for increasing efficiency in the public sector and the tax system in order to bolster its revenues," the section of the report on Israel states. The economists also note that even though Israel's economy growth is still close to its potential, there are clear signs that the labor market and the pace at which new jobs are being created in the private sector are slowing down. Up until now, the labor market was a source of strength for the economy.

This is not the first time that such comments have been made. The credit rating agencies were the first to warn that the swelling budget deficit requires belt-tightening measures. Beyond the warning itself, however, a change in the OECD's positive, friendly, and complimentary tone towards Israel in recent years is noticeable. The change in sentiment towards Israel is liable to have far worse consequences than a lowering of a growth forecast.

Actually, for the first time in a long time, the OECD's forecast is mixed with a critical attitude towards Israel: "The budget deficit will increase far beyond the targets set for 2019 and 2020 if the government does not undertake new consolidation measures," the forecast report states. "The new government must focus on conforming to the fiscal frameworks. That requires restraint in government spending, streamlining, and increasing tax revenues, among other things, by cutting tax exemptions, such as the VAT exemption for fruits and vegetables."

The OECD also expects the new government to initiate structural reforms for reducing inequality, which is still at high levels, and for encouraging competition in sectors in which it is lacking. The OECD also calls on the government to narrow gaps between the outlying areas and central Israel by supporting weak local authorities, whether by direct budgetary assistance or through changes in the budgetary mechanism for distributing revenues among the local authorities. Another interesting comment by the OECD concerns the Bank of Israel's monetary policy - that the relatively steady state of the economy justifies another interest rate hike.

Published by Globes, Israel business news - en.globes.co.il - on May 21, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Growth Photo: Shutterstock
Growth Photo: Shutterstock
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