OECD Economic Surveys: Israel 2018

Executive summary

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

The economy is strong

Israel’s economy continues to register remarkable macroeconomic and fiscal performance. Growth is strong and unemployment low and falling. With low interest rates and price stability, financial policy is prudent, and public debt is comparatively low and declining. The external position is solid, thanks to a dynamic high-tech sector. The average standard of living is improving, mainly due to higher employment rates. Continued accommodative macro policies and planned investments in the offshore gas fields in the coming years will spur further growth. Against this backdrop, Israelis remain on average more satisfied with their lives than residents of most other OECD countries.

Israel’s economy is performing strongly

Real GDP developments

Source: OECD, Economic Outlook Database.

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Income inequality has fallen, but economic disparities and a lack of social cohesion persist

Rapid employment growth has also boosted the income of the poor, benefiting the disadvantaged groups. However, the share of working poor has risen because many workers, notably Israeli-Arabs and Haredim, are in low-paid jobs due to their weak skill sets. Workers from these communities are often trapped in low-quality jobs, implying persistent inequality and weak aggregate productivity. Moreover, low social transfers imply that the often large families in these communities face deprivation that contributes to child poverty. High house prices also weigh on the social situation and well-being. Without further policy action, these trends are likely to worsen, as Israeli-Arabs and Haredim will constitute half the population by 2059.

The share of working poor is high and increasing

Share of workers in poverty

Source: OECD (2017), Income Distribution Database.

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Reforming education, infrastructure and product markets will enhance inclusiveness and productivity

To foster stronger social cohesion, a broad set of complementary reforms in product markets, infrastructure and education are critical. Further strengthening product market competition will boost productivity in sheltered sectors. Israel has a large infrastructure deficit, especially in public transport, which causes considerable road congestion and poor air quality, impedes access to the labour market and accentuates spatial segregation of disadvantaged groups living in peripheral zones. Better infrastructure in disadvantaged areas, especially Arab cities, would improve job prospects and well-being. Above all, reforms and more public investment in education would improve the skills of Haredim and Israeli-Arabs, especially women, allowing them to find well-paid jobs in high value-added sectors.

Education outcomes are poor for disadvantaged groups

Average overall PISA score, 2015

1. Haredi boys did not participate in the PISA test, as they do not study the required material. Results are thus overestimated.

Source: OECD, PISA Database; Shoresh (2017), Shoresh Handbook 2017: Education and its impact in Israel.

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MAIN FINDINGS	KEY RECOMMENDATIONS
Macroeconomic and financial policies, public-sector reforms and the housing market
The fiscal situation is healthy, with declining public debt. But, despite recent increases, weak public spending on education and infrastructure limits the government’s capacity to reduce significant socio-economic disparities and support growth. Extra spending needs to be financed. Tax collection could be improved, and there are a number of inefficient tax exemptions.	Raise the spending-growth ceiling to make room for higher expenditure on education, infrastructure and poverty reduction, while maintaining the downward trajectory of public indebtedness. Abolish inefficient tax preferences on fresh fruits and vegetables, medium-term saving in so-called “advanced training funds” (Kranot Histalmult) and services in Eilat. Raise more revenue by taxing carbon in the form of fossil fuels. Hold military spending constant in real terms in line with the existing multi-year defence plan. Further exploit available databases to improve tax collection.
Despite strong growth, prices have declined in the last three years. However, wage growth is picking up as the slack in the labour market disappears.	Maintain a supportive monetary policy, but be prepared to move ahead with gradual increases in official rates when inflation becomes entrenched in its target range.
Risks of a house-price correction are still high.	Maintain strong macro-prudential policies, and monitor housing-market developments very closely.
Real estate supply has been too rigid to adjust to strong housing demand partly due to low interest rates, causing high and rising housing prices. Local taxes on residential properties are too low for financing and maintaining the infrastructure needed for new housing development in poor municipalities.	Better coordinate large and cheaper residential developments in peripheral areas with public transport to where jobs are located. Ensure that adequate resources are provided for municipalities to finance local infrastructure services needed in new residential areas.
Fostering inclusiveness through better training and better jobs for disadvantaged groups
Labour force participation rates for Israeli-Arabs and Haredim remain low.	Evaluate systematically the effectiveness of existing active labour market policies, raising funding for effective programmes, above all for training.
The share of working poor is rising and high by international comparison. Child poverty is widespread. In-work benefits are low and insufficient for families even with two breadwinners in low-paid jobs.	Further expand the role of in-work benefits by providing higher transfers to large families where both parents are in low-paid work. Increase support for poor families conditional on their children taking up additional formal education.
Student outcomes differ significantly between educational streams, which contributes to high social and economic segregation. Inter-generational persistence of poverty is significant.	Increase funding for disadvantaged schools. Further expand Hebrew courses in the Arab stream. Expand childcare and education for children under 3, and put it under the responsibility of the Ministry of Education. Make funding to the Haredi stream conditional on an increase in core subjects in the curriculum and strengthened monitoring and testing.
Vocational education and training is underdeveloped, and many tertiary educated graduates are employed in jobs not matching their field of studies, which harms their wages and employment prospects.	Expand work-based learning in some vocational programmes. Introduce graduate tracking, and publish high-quality data and analysis about their labour market outcomes.
Improving infrastructure and product markets
Partly due to past public underinvestment, Israel has a large infrastructure deficit, especially in public transport, which causes considerable road congestion and poor air quality. Infrastructure shortages also exist in other sectors, including renewable electricity generation and hospitals. The management and implementation of large infrastructure projects is often deficient, and the planning process is lengthy and weak. Arab towns often lack adequate infrastructure facilities because of a dearth of available public land, urban-planning problems and illegal construction.	Raise budgetary resources for infrastructure. Use public-private partnership agreements, especially in public transport, following a careful and clear allocation of their risks. Promote road tolls and electricity smart meters to foster user funding of infrastructure. Shift car taxes substantially from ownership to vehicle use to reduce pollution. Introduce systematic publication of cost-benefit analyses of projects with mandatory justification of policy-makers’ choices. Decentralise and promote transparency of urban planning in Arab cities.
Despite some progress, competition in Israeli markets remains weak and the economy is less open to foreign trade than most other OECD countries. Price levels are still comparatively high, notably for food. The business environment also suffers from excessive bureaucracy.	Promote a more efficient use of infrastructure by enhancing its regulation. Introduce, in particular, competition in airport management. Replace agricultural quotas and tariffs with direct transfers to farmers. Use high-quality regulatory impact assessments based on a whole-of-government approach to cut the regulatory burden.