Israel - Financial Policies

·         Economy :-

Like other countries, the Israeli economy was affected by the world economic crisis. Nonetheless, it achieved a growth rate of more than 3% in 2010, higher than that of most industrialized countries, and an inflation rate of 2.66%. However, during the first nine months of 2015, the annual growth rate was around 1.6% and the inflation rate fell below zero to -0.5%. The general employment rate of 62% in 2010 (ages 15 to 64) has grown steadily to 64% in the first nine months of 2015.

Israel is adapting its regulatory mechanisms. Research on water and power services shows an unorganized and inefficient regulatory system with some conflicts of interests. In general, while Israel’s economic policy has its shortcomings, it largely does provide for a reliable economic environment and supports the objectives of fostering the country’s competitive capabilities and preserving attractiveness as a location for economic activity.

·         Labour Markets :-

Israel’s labor market has shown positive developments such as reduced unemployment and rising labor force participation rates in recent years. However, it suffers from a chronic problem of social groups opting out of the workforce. This situation is especially prevalent among Arab-Israeli women and ultra-orthodox Jewish males. Despite its increasingly technology-driven economy, Israel is predicted to struggle with supporting a growing segment of its aging and non-working population unless it expands and improves its education and job training infrastructure.

Israeli labor policy focuses on incentivizing two income households and expanding job training services for low skilled workers. Government actions include reforming the “earning potential” scale that is used for diverse purposes (such as taxes and day care subsidies), increasing funding for working mothers and labor training programs, and introducing a negative tax for low paid workers. The previous government passed landmark legislation in 2014 which aimed to reduce the number of ultra-orthodox men exempted from military service. The Ministry of Economy intended to follow this legislation with a substantial program of active measures directed at encouraging ultra-orthodox men to join the labor force. However, this landmark legislation was amended in 2015, reversing course back to the previous policy.

The Israeli government largely supports a free market and its labor protection laws.  Instead of the classic unions-employers negotiating, the government adopted the Danish “flexicurity model” of labor-market regulation. Based on trilateral agreements between the government, employers and unions, it aims to improve the economic status of both unionized workers and the unemployed by ensuring that they receive severance packages and unemployment benefits while allowing employers more flexibility. In 2012, new legislation increased the number of labor inspectors and their powers. Following a general strike, a new labor agreement was introduced to ameliorate working conditions for contract workers that are employed by government and municipal services. In 2014, an agreement was struck between the Histadrut Labor Federation and business leaders on a plan to increase the monthly minimum from ILS 4,300 to ILS 5,000 over two years. Shortly after, the government amended the Minimum Salary law and in November 2015 it approved a ILS 5,300 minimum salary to be implemented by 2017.

·         Taxes :-

Israel followed a consistent policy of low income tax and small government. Accordingly, it initiated cuts on direct taxes for individuals and companies and reduced public spending. In 2011 and 2012 Israel’s direct tax burdens for companies and individuals were lowest with the top income tax rate lowered from 47% in 2008 to 45% in 2010, and the corporate tax rate lowered from 27% in 2008 to 25% in 2010. The former minister of finance, Yair Lapid, who was elected on a pro-middle class ticket, continued this tax policy in the 2015. Current plans to expand the tax base seek revenues through efforts to counter tax evasion and aggressive avoidance strategies and by canceling existing tax exemptions that do not profit low-income workers.

Israel taxation policy is somewhat regressive. It includes elevating indirect taxes such as VAT, which is distributed equally on all products. Furthermore, although the direct income tax is progressively structured, and a large portion of the population earns too little to pay any income tax at all, the system creates a curve so that middle-income individuals pay more tax than low income individuals.

·         Budgets :-

After the economic crises of the mid-1980s, key steps were taken to reduce Israel’s budgetary deficit and to build a set of objectives and guidelines enabling sustainable budgetary planning. Strict budgetary-discipline laws were enacted: The Budget Foundations Law set scrupulous spending procedure regulations and implemented deficit-reporting requirements, and another law prohibited the central bank from providing loans to the government, ensuring that future deficits would be financed by borrowing from the public and abroad rather than through direct monetary injections. Consequently, fiscal power was centralized, giving the Ministry of Finance’s budget department the power to impose a policy of budgetary discipline.

Two crucial additional tools, the Arrangements Law and the Budget Deficit Reduction Law, redefined the financial and economic structure of the Israeli government. The Arrangements Law is an omnibus law passed together with each yearly budget, consisting of numerous restrictions and amendments designed to secure the state’s financial goals. In the last few years, the budget was converted to a biennial budget plan, which many regards as having a positive influence on planning capabilities.

This history of successful budgetary reform continues to contribute to the stabilization of the Israeli economy. Along with a prudent monetary policy, these measures helped the country weather the recent global economic crisis relatively successfully. Despite the expansion of public spending in recent years and a rising deficit, it seems that the Israeli budget is still managed to insure fiscal stability.

·         Research & Innovation :-

Israel’s R&D sector is based on three pillars: scientific research performed primarily in academia, research conducted in government institutes, and research conducted by civil-industrial partnerships led by the Ministry of Finance. Israel’s R&D is private-sector oriented and is becoming more so over time. In 2000, government funds accounted for 24% of total spending on civil industrial R&D development. In 2006, they accounted for only 15.9%, and in 2009 further reductions brought public investment down to 14.5%, far below the European median of 37.3%. In contrast, in 2006 private-sector investments were above the European median by more than 20%. Consequently, although government funding has declined over the years, total R&D investment as a percentage of GDP is high in comparison to many European countries. 42% of non-governmental funding for R&D is attributed to foreign investment .

In 2013 the Ministry of Science and Technology submitted a report urging the government to allocate more public funds to R&D, arguing that private funding dominance prevents long-term and high-risk exploration. The report also pointed to the continued erosion in funding of R&D at universities. This decline is exhibited both in the declining share of contributions by universities to R&D activity over the years as well as in the reduced number of scientific publications per person compared to the 1990s. In 2014, the social-economic cabinet approved the establishment of an authority aimed to encourage technological innovation.

A large portion of Israeli R&D policy is directed toward international cooperation. In 2011, Israel was engaged in 30 different international cooperative research ventures with a variety of European countries and organizations. These resulted in 250 grant applications and projects with a total budget of €250 million. The Ministry of Science and Technology secured 14 bilateral agreements with various countries including Russia, Germany and France. Israel is also a signatory to some 29 bilateral R&D agreements and is involved in five EU programs, including Eureka, Eurostars, the Competitive and Innovation Program – Enterprise Europe Network (CIP-EEN), Galileo, and Sesar. In terms of both policy and budgets, the most significant international involvement is in the Framework Programs, such as Horizon 2020, which are managed by the Israel-Europe R&D Directorate (ISERD).

·         Global Financial System :-

 Israel’s financial regulation was assessed against a number of suitability criteria. It also took steps to impose criminal penalties and apply the law to transactions made by Israeli companies abroad. Israel also established an authority tasked with increasing the accessibility of financial information. The authority works with corporate experts and publishes materials in Hebrew, Arabic and English. It also operates a public inquiries office for public complaints.

Israel has several regulatory institutions tasked with supervising financial markets. The most prominent include the Israel Securities Authority (ISA) and the Israel Antitrust Authority (IAA). These institutions are responsible for insuring market stability and fair competition. In the aftermath of the global financial crisis, different government organizations worked to limit the risk in the banking and insurance industry. Actions include tightening the rules on mortgages, and raising minimum capital ratios. Several committees were formed to investigate structural reforms and submitted their recommendations.