Inequality, widespread poverty, and income gaps, together with a projected decline in labor productivity, are the main challenges facing the Israeli economy in the coming year, according to the Organization for Economic Cooperation and Development (OECD) in a special report on the Israeli economy. The review, published once every two years, analyzes the state of the economy, its strengths, weaknesses, and principal challenges for the coming years.
Israel is portrayed poorly in the comparative poverty data, a poor level of education (especially among haredim (ultra-Orthodox Jews) and Arabs), a lack of government investment in social budgets, the spurt in real estate prices (first place), high food prices, a lack of competition, burdensome regulation, trade barriers, and the environment.
The Israeli economy is relatively strong in employment and the health system, while the national leadership wins praise for a responsible and cautious economic policy that has lowered the debt ratio and the amount of interest paid more than in any other OECD country. On the other hand, the cost of government investments in narrowing gaps in Israeli society is growing.
"Israel is also characterised by high poverty and large gaps along many material and non-material dimensions of well-being," the OECD writes. "Poverty is especially high among the elderly, in part because of low basic pensions. Employment rates for Ultra-Orthodox (Haredi) men and Arab-Israeli women remain low. Rising housing prices impose an additional affordability burden, increasingly even on the middle class. Relatively high price levels due to weak competition, in particular in the food sector, impose a greater cost, in terms of living standards, to socioeconomically disadvantaged groups."
The report also found that Israel had both the highest increase in home prices since 2008 of any other country in the OECD and an even higher increase whn compared with the average salary. On the other hand, the report found Israeli's higher than most other OECD countries in terms of satisfaction and happiness, health and academic achievement.
In the macroeconomic section of the report, the OEC states that while the tax burden in Israel is low, so are civilian spending and redistribution of wealth. For example, spending per pupil in the educational budget is still low, compared with other OECD countries, and undeveloped infrastructure, mainly in transportation, is having a negative impact on the business sector. The report criticizes the budget restrictions, and warns that if this does not change, the government's civilian spending will continue to shrink, preventing the government from investing in important social initiatives.
Cost of living
The cost of living in Israel is 20% higher than in Spain and 30% higher than in South Korea, two countries similar to Israel in per capita GDP. The OECD states, "One of the main challenges of structural reform in Israel is to increase competition and efficiency in the economy’s sheltered sectors." The OECD says that the problem is particularly severe in food prices; it was high food prices that brought about the 2011 tent protests.
According to the report, the Israeli government subsidizes agriculture only indirectly through production quotas and high customs duties - the customs duty on imported dairy products is greater than 100%. "… distortive interventions quotas, price guarantees and customs tariffs still account for over 80% of total agricultural support in Israel, compared to around 20% in the United States and the European Union," the report states, adding that the burden of government support for agriculture falls mainly on the consumers, making products 7% more expensive on the average, while "… domestic production prices were higher than international prices for milk and beef, for example, by 37% and 73%."
The report asserts that although the maximum penalty in the law is five years imprisonment, courts have never actually imposed a sentence of more than nine months on those convicted of antitrust violations, adding that if the maximum penalties are substantially increased, the judges may be less hesitant to impose severe and deterrent penalties.
Given the recent bypassing of the Antitrust Authority director general when the natural gas arrangement was signed, the OECD says that it appears that the Antitrust Authority's independence is well protected, and the government's intervention is restricted to exceptional circumstances, but adds that there is room for improvement in the Antitrust Authority's transparency.
With respect to government companies, the OECD says that the dominance and inefficiency of the government companies continues to have a negative effect on the Israeli economy. The volume of these companies' business is greater than the norm. They operate in areas protected from competition and in an environment that encourages political appointments and discourages efficiency. The report states that some of these companies have concealed unemployment, and some provide poor services.
The report singles out the Israel Postal Company for its limited office hours, exceptionally long waiting times, and customers who do not receive service." The report notes that Israel Electric Corporation's (IEC) (TASE: ELEC.B22) debt amounted to 7% of output in 2013, and the debts of Israel Railways were 13 times greater than its annual revenue. In this context, the report cites approvingly the measures taken by Government Companies Authority director Ori Yogev, including offers of minority shares in government companies.
One matter that attracted OECD criticism was government procurement policy. The report points to a significant problem that is attracting little public attention - only 20-30% of the tenders published by the government are open tenders. All the others are closed tenders with a limited number of suppliers selected in advance, or else procurement is exempt from a tender. According to the report, only 10-15% of government procurement takes place through advanced proceedings, and extending these proceedings could reduce the cost of government procurement by 12-40%.
Another point is the restrictions imposed on imports of goods and services in sectors such as sea and airborne trade, computer engineering, postal services, telecommunications, and legal services. Israel enforces more severe restrictions than the norm in 14 of the 18 sectors examined, giving it the dubious title of the most restrictive country. The report states that these restrictions are an entry barrier against foreign workers and service companies.
The report states that Israel should have more competition in banking, especially from non-banking credit entities.
The OECD report attacks the government's cautious budget policy in recent years, and its insistence on cutting spending, noting that in addition to the substantial achievement in lowering government debt, this policy is causing inadequate investment in infrastructure development, education, and welfare, while defense and interest expenses are excluding and excessively reducing social spending. For example, failure to develop mass transit infrastructure is causing enormous damage to the economy, estimated at 1.5% of GDP, as a result of traffic jams.
The report's authors praise Israel's economic leadership for its cautious monetary, economic, and budgetary policy, as a result of which Israel has enjoyed growth rates higher than the OECD average for the past decade, as well as the steepest decrease in the OECD in the ratio of debt to GDP.
However, Israel's process of budgetary consolidation or reduction has had other effects besides cutting government debt state tax revenues and government spending have also fallen sharply. In other words, the government role in the economy has been cut back, for better and for worse. The report comments that while state revenues and expenses in 2007 were slightly higher than the OECD average, today they are far below the OECD average.
The report notes that the Israeli government spent more than planned in fulfilling the coalition agreements, adding that the Israeli authorities were finding it increasingly difficult to use budget cuts as a means of achieving the deficit and debt targets they set for themselves. The report warns that the growing pressure to increase the budget without breaking the fiscal rules encourages creative accounting and overoptimistic revenue estimates. Therefore, instead of continuing to cut already low civilian spending, the report recommends that the government take action to increase revenue.
They recognize that raising taxes is politically difficult, and recommend other ways, such as an environmental tax, more thorough tax collection, and eliminating tax exemptions, such as the exemption from VAT for fruits and vegetables and the exemption from purchase tax for corporate vehicles (which will also achieve a deserving environmental aim).
The report is somewhat critical of Minister of Finance Moshe Kahlon's decision to cut VAT by 1% and corporate tax by 1.5%, following the increase in tax revenues. The OECD states that as a rule, using unexpectedly high tax revenues to cut taxes is not cautious behavior.
The report asserts that improving the productivity of the Israeli worker will become a key challenge to policy makers in Israel. The OECD says that the income gap between Israel and the other OECD countries has narrowed in recent years, thanks to increased participation in the labor force. Paradoxically, however, labor productivity in Israel has remained low, although Israel has the image of an innovative country. Beyond the investment in education and training for disadvantaged population groups, Israel must invest in transportation infrastructure and promoting the competitiveness of industries producing for the domestic market.
Published by Globes [online], Israel business news - www.globes-online.com - on January 31, 2016
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