"Israel’s output growth remains relatively strong, unemployment is at historically low levels, its high-tech sector continues to attract international admiration, and new off-shore gas fields have come on stream," says the OECD in the executive summary of its 2013 Israel Economic Survey, published today. It adds, "However, average living standards remain well below those of top-ranking OECD countries, the rate of relative poverty is the highest in the OECD area, and there are ongoing environmental challenges."
This year too, the OECD praises Israel's short-term macroeconomic indicators (growth, unemployment, and current accounts), which by nature are circumstantial, but it is worried about longer-term factors, especially income inequality and poverty, and structural characteristics in health, education, welfare, the electricity sector, and so on.
On education, the OECD advises Israel to adopt a special program to improve the education of Arabs and to implement a core curriculum at haredi (ultra-orthodox) schools.
On jobs, the OECD advises Israel to draw up a national program, which offers benefits to workers, in order to narrow the gap between the median and the average salary. It advises a fuller use of the earned income tax credit and better enforcement of labor laws. It criticizes the Ministry of Finance's reduction of the children's allowance. On the issue of the aging population, the OECD advises reviewing taxes on pensions and strongly recommends raising the retirement age of women.
On fiscal policy, the OECD advises, "Strongly prioritize reaching the current deficit targets unless growth falls substantially below assumed rates to avoid further deterioration in fiscal policy credibility."
The OECD says that an average annual GDP growth of 4% is needed to meet the deficit targets, well above the growth forecasts for the next two years. "Be ready to raise tax revenues further, preferably by base broadening and further reducing avoidance and evasion. Prioritize environmental taxes, exploit immobile tax bases, and prune tax expenditures. If needs be, raise the rate of VAT rather than income-tax rates, and tackle the resulting poverty and distributional issues through the social welfare system."
It adds, "Parenthetically, the revision of GDP should not be viewed as creating room for spending simply because the deficit as a share of GDP has fallen. However, as GDP revisions have cut the gross debt-to-GDP ratio at end-2012 from 73% to 68%, it would be an appropriate moment to consider lowering the government’s debt-to-GDP objective from the current 60%. The advantages of a smaller debt ratio include lower debt service (which is higher in Israel than the average elsewhere in the OECD) and greater flexibility in dealing with unexpected economic and geo-political shocks."
The OECD advises strengthening spending discipline by bolstering the medium-term budgeting framework by monitoring the multi-year budgetary impact of new policy measures. It advises the Ministry of Finance to stop making flat budget cuts. It adds, "The special dispensations for recent immigrants seem unlikely to represent good value for money and should be reconsidered." It also questions "whether the host of additional welfare benefits and advantageous conditions for those who have served in the army is the best way of motivating and rewarding military service, given that these privileges have the negative side-effect of perpetuating socio-economic divisions between the mainstream Jewish population, and the haredi and Arab communities."
On monetary policy, the OECD advises, "Take further macro-prudential actions, as necessary, to constrain high-risk mortgage lending. Continue to expedite planning approvals for new housing. Follow through on the establishment of a financial stability board." The OECD has repeatedly advised the establishment of such a body.
The OECD calls on the Bank of Israel to "terminate systematic “unannounced” intervention in the foreign-currency market," and, "when global monetary conditions normalize and capital flows stabilize, look toward starting interest-rate increases."
The OECD warns, "Difficulties in estimating the equilibrium exchange rate mean that, even with good intentions, interventions may prove, ex post, to have been inappropriate, resulting in heightened inflation. And there is an ever present risk that good intentions will get corrupted by political pressures such that efforts to prevent currency appreciation are pursued well beyond reasonable levels."
The OECD warns of a turnaround in the buoyant housing market, and, if so, the fallout on the economy. Some of the steep price increases of recent years reflect market adjustment following years of declining real prices, but probably not all of it. "The situation and the implication of a rise in interest rates bear continued close monitoring because experience elsewhere has shown that developing bubbles have been hard to detect and the feedback on households’ and banks’ balance sheets and the construction sector was substantial," it cautions.
The OECD advises implementing the recommendations of the concentration committee, carrying out the reforms of the Israel Electric Corporation (IEC) and natural gas sector, maintaining a competitive market, and avoiding indirect subsidies.
Published by Globes [online], Israel business news - www.globes-online.com - on December 5, 2013
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