Israel’s economy is growing strongly but further efforts are needed to fight poverty and close the gap in living standards with other leading nations, according to the Organization for Economic Cooperation and Development (OECD Economy Survey 2013.

“With strong growth projected for the coming two years and unemployment at historically low levels, the near-term outlook for the Israeli economy is very auspicious,” OECD Secretary-General Angel Gurria said as he presented the survey to Israel’s Prime Minister Benjamin Netanyahu.

According to the OECD, Israel’s output growth has been impressive, considering global economic weakness, and the output gap is close to zero in contrast to much of the OECD area.

The unemployment rate is at a 30 year low, and labour force participation has been rising steadily. Furthermore, new natural gas fields have provided an additional boost to GDP in recent quarters.

Substantial public spending cuts and revenue raising measures legislated in the latest government budget are set to bring fiscal balances back on target for this year and next.

However, staying on track with consolidation beyond this will remain challenging.

In the monetary domain foreign currency purchases have resumed, and macro prudential measures have been needed to contain potential financial risks associated with the surging housing market.

The survey underscores the importance of maintaining prudent macroeconomic frameworks and building momentum behind structural reforms, particularly in education, social and competition policies.

“To increase well-being and reduce socio-economic gaps, all citizens must have access to good education and opportunities to develop skills. Making work pay is the way forward,” Gurria said.

The survey also calls on Israel to ensure that environmental externalities are more fully incorporated into government, household and business decisions.

The survey urges continued vigilance of Israel’s housing market and points out the need to monitor and respond to financial market risks. When global financial conditions normalise and capital flows stabilise, the authorities should plan to tighten monetary policy, as necessary, while terminating intervention in the foreign currency market.
On the fiscal front, the OECD warns that measures may be required to raise revenue, particularly beyond 2014, to meet previously announced budgetary targets. Introduction of a stronger medium-term perspective in budgeting would improve spending efficiency.

The survey encourages further measures to strengthen competition in retail supply chains and reform the electricity sector, and warns against the provision of implicit fuel subsidies in the gas sector.

To strengthen Israel’s tax and transfer system, tax evasion and avoidance need to be avoided and tax bases need to be broadened. Should the need arise to boost revenue, the rates of VAT, rather than personal or corporate income tax, could be raised.

Expansion of the earned-income tax credit would help reduce in-work poverty, but the reduction in the value of child allowance can have adverse effects on low-income households. Environmental taxation in the transport sector should focus on raising taxes that influence car use, rather than ownership.

Population aging and the imminent retirement of many physicians and nurses are putting further strains on the health care system. The survey underscores a need to ensure adequate public resources, strong competition between the health funds, continued expansion of medical schools and nurse training and greater focus on poor households’ health to ensure that public care, with quality services and equal access for all, remains at the core of the system.

For more info on Israel’s economy:

http://eipa.eu.com/category/information-centre/business-economy/links-to-economic-data/

http://eipa.eu.com/category/information-centre/business-economy/economic-trends/

source: EIPA. Yosip LENKOWICZ