"The existing growth model based on high tech has not been successful in bringing the fruits of prosperity to all, and a different, more inclusive growth model is required, one that will integrate sections of the population with low rates of employment, while raising substantially their productivity and earnings," Governor of the Bank of Israel Dr. Karnit Flug said today at a seminar organized by the Central Bureau of Statistics entitled "The Face of Israeli Society Where is Israel Coming From and Where is it Going?". Flug took the opportunity to set out her social beliefs, which appear somewhat left-wing, especially in comparison with the views of Prime Minister Benjamin Netanyahu.
Flug set out the social and demographic challenges Israel faces, saying "The automatic pilot will not bring us to where we want to be. Only proactive policy can set us on the desired track."
First of all, Flug called for very active policy on the question of employment for Arabs and haredim (ultra-Orthodox Jews), and warned that, without such a policy, "Not only will we not advance, we will go backwards. We must improve their human capital. Even if they join the workforce, unless the human capital gap is closed, we are talking about low-paid employment."
Flug talked about the low rate of investment in the economy, pointing out that the ratio of investment to GDP in Israeli is just 17%, which compares with an OECD average of 22%. "The low rate of investment is well expressed in the low productivity rate," she explained.
"The challenge to growth in the coming years is enormous, because of two trends" she said. "The rate of growth of the population of working age is expected to fall from 2.2% today to only 1.2% in 2050; and the growth in the proportion of the population with low rates of employment (Arabs and haredim, is liable to shave 1.3 percentage points off the annual rate of growth."
The dependency rate (the number of people of working age from 20 to 64 in relation to the number of elderly people) is currently 5.5, but will fall to 3 in the year 2050, and this statistic, Flug said, "brings home the burden that will be placed on the pensions, health, welfare and nursing care systems. If we want to maintain the same level of old age pensions, pensions savings will have to rise substantially, as will provision for healthcare, to maintain the same level of health services."
Flug concluded that these challenges "will make necessary a significant increase government spending on public services such as education, health, and welfare, if only to maintain the current level. To ensure that this growth does not come at the expense of reducing the public debt, which is vital, a rise in tax receipts is required."
Flug explained that there were three ways of achieving this: raising tax rates; abolishing exemptions and tax breaks; and shrinking the black economy.
"The more we do on the last two fronts, the more it will be possible to raise tax receipts without raising tax rates, although a rise in tax rates will certainly be necessary to some degree," Flug said, adding that, according to research by the World Bank, the black economy amounted to 20.7% of the economy's product in 2007. In this context, Flug called for closer cooperation between government agencies. "Even within the Tax Authority, information is not shared efficiently enough," she said.
Flug spoke at length about poverty and inequality in Israel, and expressed concern at the growth in poverty among families with breadwinners. "We cannot be satisfied with a situation in which people go from welfare-based poverty to work-based poverty," she said, pointing out the very wide gaps between Israel and other OECD countries in poverty and inequality.
Published by Globes [online], Israel business news - www.globes-online.com - on February 17, 2014
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