Summary:
Per capita GDP rose by 2.5 percent in 2004,after declining for three consecutive years. GDP growth,which was led by the business sector,led to a turnaround in the unemployment rate,which declined to 10 percent of the labor force in 2004:IV. Macroeconomic policy attained its targets this year:the budget deficit contracted to 3.9 percent of GDP,slightly below the target level set by the government,and the CPI (Consumer Price Index)rose by 1.2 percent during the year,a rate that is in line with the price-stability target.Alongside the return to GDP growth,the current account of the balance of payments was in surplus.Notwithstanding,unemployment was still high and above the rate prevailing in the developed countries.
The same factors which led to the protracted recession of the last few years acted in the opposite direction in 2004 and helped to boost growth.The main ones among these were the recovery of world trade and the high-tech industries,and the relative calm on the security front.All export industries expanded,particularly high-tech but also the services, contributing 3.2 percent to the rise in GDP.In addition,private consumption rallied markedly in the wake of the rise in real wages and the restoration of consumer confidence.
The two components of macroeconomic policy—fiscal and monetary—were coordinated this year,and this served to support business-sector growth.The contraction of the budget deficit sustained the reduction of domestic interest rates,making it possible for the Bank of Israel to reduce its key rate steadily and gradually to an historically low level.The decline in the share of government consumption in GDP in the last two years served to enhance the credibility of macroeconomic policy,supported the reduction of Israel's risk premium and the turnaround in the capital market,and enabled tax rates to be reduced.Although the fall in government consumption acted directly to reduce demand, the tax reductions backed by a simultaneous contraction of the government debt,as well as low real interest rates,served to increase private consumption and domestic investment.
The main challenge facing macroeconomic policy in the coming years is to support the persistence of the growth process led by the business sector while at the same time further reducing the unemployment rate.This should be done by continuing to reduce the government expenditure/GDP ratio,so as to allow a reduction in the share of the deficit and the government debt in GDP,as this will support the low level of real interest,which promotes investment.
While the return to growth is a necessary condition for alleviating poverty in the long run,it does not guarantee the ongoing reduction of the poverty rate,because of the unbalanced nature of Israel’s economic growth in the last decade which was concentrated in high-skill-intensive industries.Hence,special policy measures are required in order to reduce poverty,primarily measures which should be anchored in quantitative targets for alleviating poverty in the long run (ten years)as an additional target of the government’s economic policy.Priorities should be set for government spending with the emphasis on investment in education and the infrastructure.The policy of reducing the number of foreign workers should continue,the government should subsidize the costs of child-care with low earning power,a negative income tax system should be introduced,and compulsory pensions should be implemented on terms that are worthwhile for low earners.
Alongside these measures,the reform of the education system along the lines recommended by the Dovrat Committee should be implemented and structural changes should be made in various spheres in order to increase competitiveness.Competition should also be intensified in the financial sphere and the recommendations of the Bachar Committee,which are in line with this aim,should be implemented.
The Economy: Development and Policies - PDF file
The same factors which led to the protracted recession of the last few years acted in the opposite direction in 2004 and helped to boost growth.The main ones among these were the recovery of world trade and the high-tech industries,and the relative calm on the security front.All export industries expanded,particularly high-tech but also the services, contributing 3.2 percent to the rise in GDP.In addition,private consumption rallied markedly in the wake of the rise in real wages and the restoration of consumer confidence.
The two components of macroeconomic policy—fiscal and monetary—were coordinated this year,and this served to support business-sector growth.The contraction of the budget deficit sustained the reduction of domestic interest rates,making it possible for the Bank of Israel to reduce its key rate steadily and gradually to an historically low level.The decline in the share of government consumption in GDP in the last two years served to enhance the credibility of macroeconomic policy,supported the reduction of Israel's risk premium and the turnaround in the capital market,and enabled tax rates to be reduced.Although the fall in government consumption acted directly to reduce demand, the tax reductions backed by a simultaneous contraction of the government debt,as well as low real interest rates,served to increase private consumption and domestic investment.
The main challenge facing macroeconomic policy in the coming years is to support the persistence of the growth process led by the business sector while at the same time further reducing the unemployment rate.This should be done by continuing to reduce the government expenditure/GDP ratio,so as to allow a reduction in the share of the deficit and the government debt in GDP,as this will support the low level of real interest,which promotes investment.
While the return to growth is a necessary condition for alleviating poverty in the long run,it does not guarantee the ongoing reduction of the poverty rate,because of the unbalanced nature of Israel’s economic growth in the last decade which was concentrated in high-skill-intensive industries.Hence,special policy measures are required in order to reduce poverty,primarily measures which should be anchored in quantitative targets for alleviating poverty in the long run (ten years)as an additional target of the government’s economic policy.Priorities should be set for government spending with the emphasis on investment in education and the infrastructure.The policy of reducing the number of foreign workers should continue,the government should subsidize the costs of child-care with low earning power,a negative income tax system should be introduced,and compulsory pensions should be implemented on terms that are worthwhile for low earners.
Alongside these measures,the reform of the education system along the lines recommended by the Dovrat Committee should be implemented and structural changes should be made in various spheres in order to increase competitiveness.Competition should also be intensified in the financial sphere and the recommendations of the Bachar Committee,which are in line with this aim,should be implemented.
The Economy: Development and Policies - PDF file