Economic Policies
#8Key Findings
With its long-term trend of stable growth, Israel receives comparatively high rankings (rank 8) in the area of economic policies. Its score on this measure has improved by 0.3 points relative to 2014.
The pandemic led to a sharp decline in economic growth in mid-2020, followed by a quick recovery and modest growth rates thereafter. Deficits rose to 5.5% of GDP in 2020 and 4.6% in 2021. Initially limited financial assistance sharply increased the rate of business failure. Relief ultimately included extended unemployment benefits, household cash benefits and employee retention grants.
Employment rates had improved prior to the pandemic, though remained low by cross-OECD standards. A pandemic-era furlough policy reduced labor-market participation by two percentage points, and is expected to increase long-term unemployment. Ultra-Orthodox Jews and Arab Israelis (particularly men) have particularly low labor-market participation rates.
Tax revenues are comparatively low. The government uses the tax system to favor certain populations. A large share of taxes are indirect, and income taxes force middle-income people to pay proportionately more than high-income peers. The R&D sector is very strong, with international cooperation a particular focus.
The pandemic led to a sharp decline in economic growth in mid-2020, followed by a quick recovery and modest growth rates thereafter. Deficits rose to 5.5% of GDP in 2020 and 4.6% in 2021. Initially limited financial assistance sharply increased the rate of business failure. Relief ultimately included extended unemployment benefits, household cash benefits and employee retention grants.
Employment rates had improved prior to the pandemic, though remained low by cross-OECD standards. A pandemic-era furlough policy reduced labor-market participation by two percentage points, and is expected to increase long-term unemployment. Ultra-Orthodox Jews and Arab Israelis (particularly men) have particularly low labor-market participation rates.
Tax revenues are comparatively low. The government uses the tax system to favor certain populations. A large share of taxes are indirect, and income taxes force middle-income people to pay proportionately more than high-income peers. The R&D sector is very strong, with international cooperation a particular focus.
Graph View
Graph View
How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
10
9
9
Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
8
7
6
7
6
Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
5
4
3
4
3
Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
2
1
1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic policy in the last year has mainly focused on coping with the effects of the COVID-19 pandemic and has substantially diverged before and after the formation of the new government in June 2021. To compensate for the negative impact on economic activity of the lockdown policies, the previous government implemented various short-term plans to support households and businesses. These included extended unemployment benefits, ad hoc universal cash benefits for households, support for the self-employed, and compensation and employee retention grants for businesses (Israel Ministry of Finance, 2020). Government assistance effectively met the needs of businesses and offset the high costs of operation, allowing them to survive the enforced closures and increase employment once the crisis began to subside (Bank of Israel, 2020).
A central shortcoming in the previous government’s economic policies was the lack of timeliness and clarity. The government did not act fast enough to provide businesses and self-employed workers with the necessary assistance at the outbreak of the crisis. Instead, in the first few months, the government provided only short-term, limited financial assistance (Ilan, 2020). Consequently, about 70,000 businesses were expected to close in Israel in 2020 – an increase of about 50% compared to 2019 (Dovrat-Meseritz, 2020).
In contrast to the previous government, the new government has focused primarily on keeping the economy open and on avoiding lockdowns. Concurrently, instead of the wide-ranging compensation mechanisms adopted by the previous government, the new government stopped the continuous extension of unemployment benefits and focused support for businesses. Like the previous government, the current government has committed to decreasing government regulation on economic activity. It has also committed to reducing the rising cost of living in Israel by lowering tariffs on agricultural products.
Israel’s strong external balance sheet has been resilient to the pandemic. Israel has recorded current account surpluses (CAS) each year since 2003 and the surplus increased to 5% of GDP in 2020. Fitch Ratings expects annual CAS to be 4% of GDP on average between 2021 and 2023, as growth in service exports remains robust, driven primarily by high-tech sectors. CAS combined with strong net FDI inflows has led to appreciation pressures and contributed to a sharp increase in foreign-exchange reserves since 2019. Due to the Bank of Israel’s interventions to contain the appreciation, foreign-exchange reserves reached $200 billion in mid-2021 (approximately two years of estimated current external payments, well above the peer median of four months) from $126 billion in 2019 (Fitch Ratings 2021).
Citations:
Bank of Israel. 2020. “Remarks by the Governor of the Bank of Israel at the Cabinet meeting on the bill for the Economic Assistance Program,” Announcements and publications, retrieved from https://www.boi.org.il/he/NewsAndPublications/PressReleases/Pages/22-9-20.aspx
Bank of Israel. 2020. “The Governor’s remarks at a cabinet meeting on the issue of a grant for all Israeli citizens,” Announcements and publications, retrieved from https://www.boi.org.il/he/NewsAndPublications/PressReleases/Pages/19-7-20.aspx
Barkat Amiram. 2020. “A grant for every citizen? New research states that a large portion of the money has been rolled over to overdraft,” Globes, website (Hebrew), October 28, 2020 retrieved from https://www.globes.co.il/news/article.aspx?did=1001347476
Dovrat-Meseritz Adi. 2020. “Up to 70,000 Israeli Businesses Forecast to Go Under Amid Coronavirus Crisis,” Haaretz, retrieved from https://www.haaretz.com/israel-news/business/.premium-up-to-70-000-israeli-businesses-forecast-to-go-under-amid-coronavirus-crisis-1.8844610
Fitch Ratings (2021), “RATING ACTION COMMENTARY,” Retrived from: https://www.fitchratings.com/research/sovereigns/fitch-affirms-israel-at-a-outlook-stable-29-07-2021
Ilan Sharar. 2020. “The Provisional Government has broken the records of emergency regulations,” calcalist, website (Hebrew), retrieved from https://www.calcalist.co.il/local/articles/0,7340,L-3811853,00.html
Israel Ministry of Finance 2020. “Economic Security Net 2020-2021,” Retrieved from https://www.gov.il/he/departments/news/press_09072020
The Knesset Website. 2020. “Knesset passes bill to give one-time stimulus grants to most Israeli citizens,” News, Retrieved from: https://main.knesset.gov.il/EN/News/PressReleases/Pages/press29720v.aspx.
A central shortcoming in the previous government’s economic policies was the lack of timeliness and clarity. The government did not act fast enough to provide businesses and self-employed workers with the necessary assistance at the outbreak of the crisis. Instead, in the first few months, the government provided only short-term, limited financial assistance (Ilan, 2020). Consequently, about 70,000 businesses were expected to close in Israel in 2020 – an increase of about 50% compared to 2019 (Dovrat-Meseritz, 2020).
In contrast to the previous government, the new government has focused primarily on keeping the economy open and on avoiding lockdowns. Concurrently, instead of the wide-ranging compensation mechanisms adopted by the previous government, the new government stopped the continuous extension of unemployment benefits and focused support for businesses. Like the previous government, the current government has committed to decreasing government regulation on economic activity. It has also committed to reducing the rising cost of living in Israel by lowering tariffs on agricultural products.
Israel’s strong external balance sheet has been resilient to the pandemic. Israel has recorded current account surpluses (CAS) each year since 2003 and the surplus increased to 5% of GDP in 2020. Fitch Ratings expects annual CAS to be 4% of GDP on average between 2021 and 2023, as growth in service exports remains robust, driven primarily by high-tech sectors. CAS combined with strong net FDI inflows has led to appreciation pressures and contributed to a sharp increase in foreign-exchange reserves since 2019. Due to the Bank of Israel’s interventions to contain the appreciation, foreign-exchange reserves reached $200 billion in mid-2021 (approximately two years of estimated current external payments, well above the peer median of four months) from $126 billion in 2019 (Fitch Ratings 2021).
Citations:
Bank of Israel. 2020. “Remarks by the Governor of the Bank of Israel at the Cabinet meeting on the bill for the Economic Assistance Program,” Announcements and publications, retrieved from https://www.boi.org.il/he/NewsAndPublications/PressReleases/Pages/22-9-20.aspx
Bank of Israel. 2020. “The Governor’s remarks at a cabinet meeting on the issue of a grant for all Israeli citizens,” Announcements and publications, retrieved from https://www.boi.org.il/he/NewsAndPublications/PressReleases/Pages/19-7-20.aspx
Barkat Amiram. 2020. “A grant for every citizen? New research states that a large portion of the money has been rolled over to overdraft,” Globes, website (Hebrew), October 28, 2020 retrieved from https://www.globes.co.il/news/article.aspx?did=1001347476
Dovrat-Meseritz Adi. 2020. “Up to 70,000 Israeli Businesses Forecast to Go Under Amid Coronavirus Crisis,” Haaretz, retrieved from https://www.haaretz.com/israel-news/business/.premium-up-to-70-000-israeli-businesses-forecast-to-go-under-amid-coronavirus-crisis-1.8844610
Fitch Ratings (2021), “RATING ACTION COMMENTARY,” Retrived from: https://www.fitchratings.com/research/sovereigns/fitch-affirms-israel-at-a-outlook-stable-29-07-2021
Ilan Sharar. 2020. “The Provisional Government has broken the records of emergency regulations,” calcalist, website (Hebrew), retrieved from https://www.calcalist.co.il/local/articles/0,7340,L-3811853,00.html
Israel Ministry of Finance 2020. “Economic Security Net 2020-2021,” Retrieved from https://www.gov.il/he/departments/news/press_09072020
The Knesset Website. 2020. “Knesset passes bill to give one-time stimulus grants to most Israeli citizens,” News, Retrieved from: https://main.knesset.gov.il/EN/News/PressReleases/Pages/press29720v.aspx.
Graph View
How effectively does labor market policy address unemployment?
10
9
9
Successful strategies ensure unemployment is not a serious threat.
8
7
6
7
6
Labor market policies have been more or less successful.
5
4
3
4
3
Strategies against unemployment have shown little or no significant success.
2
1
1
Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Israel entered the pandemic with a sound labor market – historically high rates of labor force participation (which are nevertheless relatively low in comparison to the OECD average), particularly for women, and low rates of unemployment. However, when the pandemic hit, Israel adopted a furlough model, which meant that workers placed on a leave of absence were entitled to receive unemployment benefits, but only if they did not work at all. These workers retained their contractual connection with their employers, but there were no options for continuing to work part-time while receiving partial unemployment benefits (Zontag, Epstein, and Weiss 2020). Concurrently, the government extended the duration of unemployment benefits for workers on furlough until June 2021, allowing businesses to put all of their workers on unpaid leave regardless of how much their revenues were hurt. According to a report published in August by the Israeli employment service, while on the one hand this binary policy created some certainty in the economy, helped businesses stay open for longer and gave employees a measure of relief, on the other hand it also hurt the connection between employee and employer, created a negative incentive for employees to return to work, and will result in much higher long-term unemployment. Indeed, the labor market participation rate dropped by two percentage points. The adoption of a more flexible model, in which the government would cover only the hours of lost work rather than pay unemployment compensation for entire salaries, would have cost the government less and would have lowered the unemployment rate. The government could have also invested more in vocational training, which would have created incentives for workers to go back to work.
More generally, the Israeli labor market continues to be characterized by a sharp divide between high earners, especially in the booming financial and technological sectors, and low earners, especially in the low end of the service sector. This results in a very high low-pay incidence. Recently, the government decided to raise the monthly minimum wage from ILS 5,300 to ILS 6,000 over the next four years. A persistent challenge is the low participation and skills levels of ultra-Orthodox Jews and Arab Israelis (particularly men) in the labor market. Government policies that aim to increase employment among these populations have so far seen limited success.
Citations:
Peleg, Bar (2021), “Income Inequality in Israel Widens in 2021, Despite a Drop Last Year,” Haaretz. Retrived from: https://www.haaretz.com/israel-news/.premium-income-inequality-widened-in-2021-despite-economic-rebound-1.10502510
OECD (2022), Labour productivity forecast (indicator). doi: 10.1787/cb12b189-en (Accessed on 05 January 2022)
Zontag, Noam, Gil Epstein, and Avi Weiss (2020). “The Israeli Labor Market Under the Coronavirus: An Overview.” State of the nation report: Society, economy and policy in Israel
The State Comptroller. 2020. ” The Government’s Handling of the Unemployed and Work-Intensives in the Corona Crisis: Interim Findings for a Report to be Published in 2021,” Retrieved from https://www.mevaker.gov.il/sites/DigitalLibrary/Pages/Publications/710.aspx
Israeli Employment Service. 2020. Information and publications, “Continuation of the Corona Crisis: The Need for Rapid and Focused Intervention for the Encouragement of Employment and Human Capital Development,” retrieved from https://www.taasuka.gov.il/he/InfoAndPublications/ReasearchAndReviews/pages/coronaencouragingemployment.aspx Public Health Order (New Coronavirus 2019) (Instructions for the Employer of a Home Insulation Employee) (Temporary Order), 2020,” retrieved from https://www.nevo.co.il/general/CoronaUpdates.aspx#Item08
The Jerusalem Post, “Israel’s minimum wage is increasing: Here’s what you need to know,” January 26, 2022, https://www.jpost.com/business-and-innovation/banking-and-finance/article-694611
More generally, the Israeli labor market continues to be characterized by a sharp divide between high earners, especially in the booming financial and technological sectors, and low earners, especially in the low end of the service sector. This results in a very high low-pay incidence. Recently, the government decided to raise the monthly minimum wage from ILS 5,300 to ILS 6,000 over the next four years. A persistent challenge is the low participation and skills levels of ultra-Orthodox Jews and Arab Israelis (particularly men) in the labor market. Government policies that aim to increase employment among these populations have so far seen limited success.
Citations:
Peleg, Bar (2021), “Income Inequality in Israel Widens in 2021, Despite a Drop Last Year,” Haaretz. Retrived from: https://www.haaretz.com/israel-news/.premium-income-inequality-widened-in-2021-despite-economic-rebound-1.10502510
OECD (2022), Labour productivity forecast (indicator). doi: 10.1787/cb12b189-en (Accessed on 05 January 2022)
Zontag, Noam, Gil Epstein, and Avi Weiss (2020). “The Israeli Labor Market Under the Coronavirus: An Overview.” State of the nation report: Society, economy and policy in Israel
The State Comptroller. 2020. ” The Government’s Handling of the Unemployed and Work-Intensives in the Corona Crisis: Interim Findings for a Report to be Published in 2021,” Retrieved from https://www.mevaker.gov.il/sites/DigitalLibrary/Pages/Publications/710.aspx
Israeli Employment Service. 2020. Information and publications, “Continuation of the Corona Crisis: The Need for Rapid and Focused Intervention for the Encouragement of Employment and Human Capital Development,” retrieved from https://www.taasuka.gov.il/he/InfoAndPublications/ReasearchAndReviews/pages/coronaencouragingemployment.aspx Public Health Order (New Coronavirus 2019) (Instructions for the Employer of a Home Insulation Employee) (Temporary Order), 2020,” retrieved from https://www.nevo.co.il/general/CoronaUpdates.aspx#Item08
The Jerusalem Post, “Israel’s minimum wage is increasing: Here’s what you need to know,” January 26, 2022, https://www.jpost.com/business-and-innovation/banking-and-finance/article-694611
Graph View
How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
10
9
9
Taxation policy fully achieves the objectives.
8
7
6
7
6
Taxation policy largely achieves the objectives.
5
4
3
4
3
Taxation policy partially achieves the objectives.
2
1
1
Taxation policy does not achieve the objectives at all.
Israel’s taxation policy appears to be quite effective in terms of raising revenues. Over the past five years, Israeli authorities have collected more in tax revenue than had been projected in the government’s budget proposals. Nevertheless, tax revenues in Israel are comparatively low and this sets limits on government spending.
Israel’s taxation policy is somewhat regressive. A large share of taxes in Israel are indirect. This includes VAT, which is levied equally on all products. Furthermore, although the direct income tax is progressively structured, and a large portion of the population makes too little money to pay any income tax at all, the system creates a curve that forces middle-income individuals to pay proportionately more tax than high-income individuals. This apparent distortion is an intentional economic strategy meant to induce growth by reducing the tax burden associated with investments and companies. While controversial, it is not necessarily unfair as such.
Israel utilizes its tax system as a political instrument. For example, it offers tax reductions to army veterans and for Jewish immigrants, thereby discriminating against Palestinian citizens. At the same time, various tax exemptions have a valid rationale (e.g., assisting working parents and encouraging higher education) and do not appear to violate the principle of horizontal or vertical equality.
The Encouragement of Capital Investments Law (ECIL) provides tax discounts for factories and businesses that invest in peripheral areas. This is done both to keep Israel’s taxes competitive in the global market and to incentivize the creation of jobs in disenfranchised regions. The ECIL has been criticized in recent years, especially at the end of 2017 following the large layoff of Teva employees – an Israeli pharmaceutical company that had received substantial tax benefits.
The tax system is sporadically used to promote environmental goals, for example, in the context of taxes on energy and cars. The new government has introduced a new tax on disposable plasticware, but this was not part of an overall strategy.
Citations:
Barket, Amiram, “Israel’s budget surpluses are becoming a habit,” Globes, 15.10.2017: http://www.globes.co.il/en/article-israels-budget-surpluses-are-becoming-a-habit-1001207772
Medina, Barak. “Discrimination Under the Auspices of the State.” Ha’aretz, May 20th, 2014.
OECD, Revenue Statistics 2021 – Israel, https://www.oecd.org/tax/revenue-statistics-israel.pdf
Stub, Zev, “More challenges arise for Israel’s tax on disposable utensils,” The Jerusalem Post, November 24, 2021, https://www.jpost.com/environment-and-climate-change/more-challenges-arise-for-israels-tax-on-disposable-utensils-686864
Waksman, Avi, “Wanted: A Tax Policy for Israel’s Economy, Not for Elections,” Haaretz, 20.09.2018:
https://www.haaretz.com/israel-news/business/wanted-a-tax-policy-for-israel-s-economy-not-for-elections-1.6492218
Vaxman, Avi, “End to the tax surplus celebration? 600 million shekels forecast miss,” The Marker, 09.07.2018:
https://www.themarker.com/news/macro/1.6249613
Israel’s taxation policy is somewhat regressive. A large share of taxes in Israel are indirect. This includes VAT, which is levied equally on all products. Furthermore, although the direct income tax is progressively structured, and a large portion of the population makes too little money to pay any income tax at all, the system creates a curve that forces middle-income individuals to pay proportionately more tax than high-income individuals. This apparent distortion is an intentional economic strategy meant to induce growth by reducing the tax burden associated with investments and companies. While controversial, it is not necessarily unfair as such.
Israel utilizes its tax system as a political instrument. For example, it offers tax reductions to army veterans and for Jewish immigrants, thereby discriminating against Palestinian citizens. At the same time, various tax exemptions have a valid rationale (e.g., assisting working parents and encouraging higher education) and do not appear to violate the principle of horizontal or vertical equality.
The Encouragement of Capital Investments Law (ECIL) provides tax discounts for factories and businesses that invest in peripheral areas. This is done both to keep Israel’s taxes competitive in the global market and to incentivize the creation of jobs in disenfranchised regions. The ECIL has been criticized in recent years, especially at the end of 2017 following the large layoff of Teva employees – an Israeli pharmaceutical company that had received substantial tax benefits.
The tax system is sporadically used to promote environmental goals, for example, in the context of taxes on energy and cars. The new government has introduced a new tax on disposable plasticware, but this was not part of an overall strategy.
Citations:
Barket, Amiram, “Israel’s budget surpluses are becoming a habit,” Globes, 15.10.2017: http://www.globes.co.il/en/article-israels-budget-surpluses-are-becoming-a-habit-1001207772
Medina, Barak. “Discrimination Under the Auspices of the State.” Ha’aretz, May 20th, 2014.
OECD, Revenue Statistics 2021 – Israel, https://www.oecd.org/tax/revenue-statistics-israel.pdf
Stub, Zev, “More challenges arise for Israel’s tax on disposable utensils,” The Jerusalem Post, November 24, 2021, https://www.jpost.com/environment-and-climate-change/more-challenges-arise-for-israels-tax-on-disposable-utensils-686864
Waksman, Avi, “Wanted: A Tax Policy for Israel’s Economy, Not for Elections,” Haaretz, 20.09.2018:
https://www.haaretz.com/israel-news/business/wanted-a-tax-policy-for-israel-s-economy-not-for-elections-1.6492218
Vaxman, Avi, “End to the tax surplus celebration? 600 million shekels forecast miss,” The Marker, 09.07.2018:
https://www.themarker.com/news/macro/1.6249613
Graph View
To what extent does budgetary policy realize the goal of fiscal sustainability?
10
9
9
Budgetary policy is fiscally sustainable.
8
7
6
7
6
Budgetary policy achieves most standards of fiscal sustainability.
5
4
3
4
3
Budgetary policy achieves some standards of fiscal sustainability.
2
1
1
Budgetary policy is fiscally unsustainable.
Israel’s fiscal policy is characterized by rather strict budgetary discipline, which is maintained by the significant power of the Ministry of Finance, a fiscal framework that sets limits on public deficits and annual increases in public spending, and the so-called Arrangements Law. The Arrangements Law is an omnibus law that is passed in parallel with each budget, consists of numerous restrictions and amendments, and is designed to secure the state’s financial goals.
Israel’s comparatively strong fiscal position was maintained during the pandemic. In terms of the deficit, Israel posted a budget deficit (ILBUD=ECI) of 4.6% of gross domestic product by the end of 2021, down from 5.5% during the same period in 2020. The improvement came as an economic rebound that has led to higher-than-expected tax revenue. Over the past year, tax income is up 23.1% from the same period in 2020 (BOI 2021). Consequently, the increase of public debt has been relatively low in comparison to other OECD countries.
The ILS 609 billion ($194 billion) spending plan for 2021 is the first budget Israel has passed since 2018. This delay was due to a prolonged political deadlock, which saw successive governments fall before they could bring a proposal to the Knesset. The 2022 spending plan stands at ILS 562.9 billion ($180 billion). The overall budget marks a major reorientation of Israel’s allocation of resources and financial priorities in the coming years. It is based on the principles of streamlining government operations, upgrading public services, boosting economic competitiveness, cutting regulations to support public and private sector growth, limiting Israel’s shadow economy, boosting transportation, housing, energy and technology infrastructure, and investing in human capital by training and integrating marginalized populations into the workforce (Ben David 2021).
The Knesset’s approval of the 2021–2022 budget has reduced political uncertainty and risks to public finances, affirming the government’s capacity to advance legislation. Fitch Ratings increased Israel’s rating from A to A+. According to Fitch Ratings, “Israel’s A+ rating balances a diversified, high value-added economy, which proved resilient to the COVID-19 pandemic, strong external finances and solid institutional strength” (Fitch Ratings 2021).
Citations:
Bank of Israel (BOI), “Economic indicators: Public Sector Activity,” 2021. Retrived from: https://www.boi.org.il/en/DataAndStatistics/Pages/Indicators.aspx?Level=1&IndicatorId=5&Sid=5
Fitch Ratings (2021), “RATING ACTION COMMENTARY,” Retrived from: https://www.fitchratings.com/research/sovereigns/fitch-affirms-israel-at-a-outlook-stable-29-07-2021
Kershner, Isabel (2021), “Israel Passes First Budget in More Than 3 Years in Lifeline for Government.” The New York Times, 05 of January 2022. Retrived from: https://www.nytimes.com/2021/11/04/world/middleeast/israel-budget.html
Knesset 2021. “Knesset Plenum votes to approve 2021-2022 state budget and Arrangements Law” Retrived from: https://main.knesset.gov.il/EN/News/PressReleases/Pages/press51121q.aspx
Ben David, Ricky. 2021, “How much of a revolution? 13 key reforma in Israel’s new State Budget,” The times of Israel. Retrived from: https://www.timesofisrael.com/how-much-of-a-revolution-13-key-plans-in-israels-new-state-budget/
Israel’s comparatively strong fiscal position was maintained during the pandemic. In terms of the deficit, Israel posted a budget deficit (ILBUD=ECI) of 4.6% of gross domestic product by the end of 2021, down from 5.5% during the same period in 2020. The improvement came as an economic rebound that has led to higher-than-expected tax revenue. Over the past year, tax income is up 23.1% from the same period in 2020 (BOI 2021). Consequently, the increase of public debt has been relatively low in comparison to other OECD countries.
The ILS 609 billion ($194 billion) spending plan for 2021 is the first budget Israel has passed since 2018. This delay was due to a prolonged political deadlock, which saw successive governments fall before they could bring a proposal to the Knesset. The 2022 spending plan stands at ILS 562.9 billion ($180 billion). The overall budget marks a major reorientation of Israel’s allocation of resources and financial priorities in the coming years. It is based on the principles of streamlining government operations, upgrading public services, boosting economic competitiveness, cutting regulations to support public and private sector growth, limiting Israel’s shadow economy, boosting transportation, housing, energy and technology infrastructure, and investing in human capital by training and integrating marginalized populations into the workforce (Ben David 2021).
The Knesset’s approval of the 2021–2022 budget has reduced political uncertainty and risks to public finances, affirming the government’s capacity to advance legislation. Fitch Ratings increased Israel’s rating from A to A+. According to Fitch Ratings, “Israel’s A+ rating balances a diversified, high value-added economy, which proved resilient to the COVID-19 pandemic, strong external finances and solid institutional strength” (Fitch Ratings 2021).
Citations:
Bank of Israel (BOI), “Economic indicators: Public Sector Activity,” 2021. Retrived from: https://www.boi.org.il/en/DataAndStatistics/Pages/Indicators.aspx?Level=1&IndicatorId=5&Sid=5
Fitch Ratings (2021), “RATING ACTION COMMENTARY,” Retrived from: https://www.fitchratings.com/research/sovereigns/fitch-affirms-israel-at-a-outlook-stable-29-07-2021
Kershner, Isabel (2021), “Israel Passes First Budget in More Than 3 Years in Lifeline for Government.” The New York Times, 05 of January 2022. Retrived from: https://www.nytimes.com/2021/11/04/world/middleeast/israel-budget.html
Knesset 2021. “Knesset Plenum votes to approve 2021-2022 state budget and Arrangements Law” Retrived from: https://main.knesset.gov.il/EN/News/PressReleases/Pages/press51121q.aspx
Ben David, Ricky. 2021, “How much of a revolution? 13 key reforma in Israel’s new State Budget,” The times of Israel. Retrived from: https://www.timesofisrael.com/how-much-of-a-revolution-13-key-plans-in-israels-new-state-budget/
Graph View
To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
10
9
9
Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
8
7
6
7
6
Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
5
4
3
4
3
Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
2
1
1
Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Israel’s research and development (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 overseen the by Ministry of Finance. For many years, Israel has led the world in research and development (R&D) investment, spending more on R&D as a share of GDP than any other developed country.
A large portion of Israel’s R&D policy is directed toward international cooperation. In 2019, Israel was engaged in around 70 different international cooperative research ventures with a variety of European countries and organizations. Overall, 90 Israeli companies have received grants or another financing to conduct R&D activities with companies from other countries. Israel has also signed 29 bilateral R&D agreements, which fund around 100 new projects each year, and is a partner in five EU programs, including Eureka, Eurostars, the Competitive and Innovation Program – Enterprise Europe Network (CIP-EEN), Galileo, and Sesar. In terms of R&D policy and budgets, the most significant international involvement is through framework programs, such as Horizon 2020, which are managed by the Israel-Europe R&D Directorate.
Despite Israel’s strong R&D position at the beginning of the coronavirus crisis, the rate of the government’s support for research in the fields of health, environment and infrastructure development was very low compared to other OECD countries. Only 0.5% of government investments in R&D were in the field of health (Buchnik, Klein & Getz, 2020). This long-term trend must be reversed if Israel is to maintain its position as a global leader in the field of innovation.
Despite the maturation and prosperity of Israel’s high-tech industry, the market failures that characterize the industry are becoming more complex, and there is a greater need for private market participation in the risks inherent in seed and early- stage investments, especially against the background of increased later stage investment (Israel Innovation Authority 2021). Moreover, The Israeli high-tech industry is undergoing a transformation. More Israeli companies are preserving their independence rather than becoming R&D centers for multinational corporations as was customary in the past. A crucial question is whether this will lead to more diversified local manufacturing jobs and a change the current situation in which the fruits of R&D investment are mainly enjoyed by a small share of Israelis.
Citations:
Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO), The Global Innovation Index 2019: Creating Healthy Lives – The Future of Medical Innovation, Genf 2019, https://www.globalinnovationindex.org/gii-2019-report
Innovation in Israel overview 2018-2019, Israel Innovation Authority, 2019 (Hebrew)
https://innovationisrael.org.il/en/sites/default/files/2018-19_Innovation_Report.pdf
Dutta, Soumitra, Bruno Lanvin, and Sacha Wunsch-Vincent (Editors), “The Global Innovation Index 2017. Innovation Feeding the World,” https://www.globalinnovationindex.org/gii-2017-report
Cornell University, INSEAD, and WIPO, “The Global Innovation Index 2019: Energizing the World with Innovation,” Ithaca, Fontainebleau, and Geneva, 2018: https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2019.pdf
Bilateral Programs, ISRED, 17.10.2018:
http://www.iserd.org.il/binational_programs
“EU – Israel Research and innovation cooperation – 20 years of success, partnership, and friendship,” The European Commission, 12.01.2017:
https://ec.europa.eu/research/iscp/index.cfm?pg=israel
Israel Innovation Authority (2021), “2021 Innovation Report,” 05 January 2022, Retrived from: https://innovationisrael.org.il/sites/default/files/The%20Israel%20Innovation%20Report%202021.pdf
Beeri, Tamar, “Start-Up Nation: Israel spends the most money in the world on R&D – WEF, The Jerusalem Post website, November 5, 2020, retrieved from https://www.jpost.com/jpost-tech/start-up-nation-israel-spends-most-money-in-the-world-on-r-and-d-wef-648192
Buchnik Tzipi, Klein Rinat, Getz Dafna. Medical research in Israel – the government must wake up before the next crisis Haifa, Israel, Shmuel Ne’eman Institute, November 2020, retrieved from https://www.neaman.org.il/Medical-research-in-Israel-a-wake-up-call-for-the-government-before-the-next-crisis
Israel Ministry of Foreign Affairs, Science, Science, and Technology: Research and Development, n.d, accessed on January 10, 2020, retrieved from https://mfa.gov.il/mfa/aboutisrael/science/pages/science%20and%20technology-%20research%20and%20development.aspx
A large portion of Israel’s R&D policy is directed toward international cooperation. In 2019, Israel was engaged in around 70 different international cooperative research ventures with a variety of European countries and organizations. Overall, 90 Israeli companies have received grants or another financing to conduct R&D activities with companies from other countries. Israel has also signed 29 bilateral R&D agreements, which fund around 100 new projects each year, and is a partner in five EU programs, including Eureka, Eurostars, the Competitive and Innovation Program – Enterprise Europe Network (CIP-EEN), Galileo, and Sesar. In terms of R&D policy and budgets, the most significant international involvement is through framework programs, such as Horizon 2020, which are managed by the Israel-Europe R&D Directorate.
Despite Israel’s strong R&D position at the beginning of the coronavirus crisis, the rate of the government’s support for research in the fields of health, environment and infrastructure development was very low compared to other OECD countries. Only 0.5% of government investments in R&D were in the field of health (Buchnik, Klein & Getz, 2020). This long-term trend must be reversed if Israel is to maintain its position as a global leader in the field of innovation.
Despite the maturation and prosperity of Israel’s high-tech industry, the market failures that characterize the industry are becoming more complex, and there is a greater need for private market participation in the risks inherent in seed and early- stage investments, especially against the background of increased later stage investment (Israel Innovation Authority 2021). Moreover, The Israeli high-tech industry is undergoing a transformation. More Israeli companies are preserving their independence rather than becoming R&D centers for multinational corporations as was customary in the past. A crucial question is whether this will lead to more diversified local manufacturing jobs and a change the current situation in which the fruits of R&D investment are mainly enjoyed by a small share of Israelis.
Citations:
Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO), The Global Innovation Index 2019: Creating Healthy Lives – The Future of Medical Innovation, Genf 2019, https://www.globalinnovationindex.org/gii-2019-report
Innovation in Israel overview 2018-2019, Israel Innovation Authority, 2019 (Hebrew)
https://innovationisrael.org.il/en/sites/default/files/2018-19_Innovation_Report.pdf
Dutta, Soumitra, Bruno Lanvin, and Sacha Wunsch-Vincent (Editors), “The Global Innovation Index 2017. Innovation Feeding the World,” https://www.globalinnovationindex.org/gii-2017-report
Cornell University, INSEAD, and WIPO, “The Global Innovation Index 2019: Energizing the World with Innovation,” Ithaca, Fontainebleau, and Geneva, 2018: https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2019.pdf
Bilateral Programs, ISRED, 17.10.2018:
http://www.iserd.org.il/binational_programs
“EU – Israel Research and innovation cooperation – 20 years of success, partnership, and friendship,” The European Commission, 12.01.2017:
https://ec.europa.eu/research/iscp/index.cfm?pg=israel
Israel Innovation Authority (2021), “2021 Innovation Report,” 05 January 2022, Retrived from: https://innovationisrael.org.il/sites/default/files/The%20Israel%20Innovation%20Report%202021.pdf
Beeri, Tamar, “Start-Up Nation: Israel spends the most money in the world on R&D – WEF, The Jerusalem Post website, November 5, 2020, retrieved from https://www.jpost.com/jpost-tech/start-up-nation-israel-spends-most-money-in-the-world-on-r-and-d-wef-648192
Buchnik Tzipi, Klein Rinat, Getz Dafna. Medical research in Israel – the government must wake up before the next crisis Haifa, Israel, Shmuel Ne’eman Institute, November 2020, retrieved from https://www.neaman.org.il/Medical-research-in-Israel-a-wake-up-call-for-the-government-before-the-next-crisis
Israel Ministry of Foreign Affairs, Science, Science, and Technology: Research and Development, n.d, accessed on January 10, 2020, retrieved from https://mfa.gov.il/mfa/aboutisrael/science/pages/science%20and%20technology-%20research%20and%20development.aspx
Graph View
To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
10
9
9
The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
8
7
6
7
6
The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
5
4
3
4
3
The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
2
1
1
The government does not contribute to improving the regulation and supervision of financial markets.
Israel has several regulatory institutions tasked with supervising financial markets. The most prominent include the Supervisor of Banks at the Bank of Israel, the Capital Market, Insurance and Savings Authority at the Ministry of Finance, the Israel Securities Authority (ISA), and the Israel Antitrust Authority. These institutions are responsible for ensuring market stability and fair competition. In the aftermath of the global financial crisis, different government organizations worked to limit risk in the banking and insurance industry. Actions include tightening the rules on mortgages, adopting Basel III regulation and raising minimum capital ratios. Several committees have been formed to investigate structural reforms and submit policy recommendations. Both OECD and central bank assessments have been cautiously optimistic, with the latter pointing to important regulatory tools that are currently being developed for future implementation. In November 2019, Israel decided to establish a mechanism to oversee foreign investments, especially Chinese investments.
Israel’s Consumer Protection and Fairtrade Authority participates in various international forums to enhance cooperation and information transparency between Israel and other countries or economic organizations. According to the authority, most countries share similar practices with Israel, which facilitates information sharing and cooperation. For example, Israel is a member of the OECD Committee on Consumer Policy, which publishes guidelines and recommendations on consumer policy in the OECD. Israel has adopted many of these recommendations. Israel is also one of the 60 countries that participate in the International Consumer Protection and Enforcement Network (ICPEN). ICPEN is responsible for research and analysis on consumption, facilitates the exchange of information, develops guidelines, and is involved in economic law enforcement activities as part of this network.
Citations:
“Financial stability report,” Bank of Israel 2014 (Hebrew). “Israel – Economic forecast summary,” November 2014. http://www.oecd.org/economy/israel-economic-forecast-summary.htm.
ISA annual report 2017, ISA website, 27.06.2018, http://www.isa.gov.il/sites/ISAEng/1489/1512/Documents/ENG-FINAL.pdf
Ministry of Finance, The Authority for Capital Market, Insurance and Savings, Annual report 2017 chapter 1, 01.07.2018(Hebrew), https://mof.gov.il/hon/documents/report2017_chapter1.pdf
The Consumer Protection and Fair Trade Authority – International Activity, Israel Government, 2019 (Hebrew)
https://www.gov.il/he/Departments/General/cpfta_about_international_activity
Herb, Keinon, “Under U.S. Pressure, Israel Okays Mechanism to Oversee Chinese Investments,” Jerusalem Post, 30.10.2019, https://www.jpost.com/Israel-News/Under-US-pressure-Israel-okays-mechanism-to-oversee-Chinese-investments-606326
Israel’s Consumer Protection and Fairtrade Authority participates in various international forums to enhance cooperation and information transparency between Israel and other countries or economic organizations. According to the authority, most countries share similar practices with Israel, which facilitates information sharing and cooperation. For example, Israel is a member of the OECD Committee on Consumer Policy, which publishes guidelines and recommendations on consumer policy in the OECD. Israel has adopted many of these recommendations. Israel is also one of the 60 countries that participate in the International Consumer Protection and Enforcement Network (ICPEN). ICPEN is responsible for research and analysis on consumption, facilitates the exchange of information, develops guidelines, and is involved in economic law enforcement activities as part of this network.
Citations:
“Financial stability report,” Bank of Israel 2014 (Hebrew). “Israel – Economic forecast summary,” November 2014. http://www.oecd.org/economy/israel-economic-forecast-summary.htm.
ISA annual report 2017, ISA website, 27.06.2018, http://www.isa.gov.il/sites/ISAEng/1489/1512/Documents/ENG-FINAL.pdf
Ministry of Finance, The Authority for Capital Market, Insurance and Savings, Annual report 2017 chapter 1, 01.07.2018(Hebrew), https://mof.gov.il/hon/documents/report2017_chapter1.pdf
The Consumer Protection and Fair Trade Authority – International Activity, Israel Government, 2019 (Hebrew)
https://www.gov.il/he/Departments/General/cpfta_about_international_activity
Herb, Keinon, “Under U.S. Pressure, Israel Okays Mechanism to Oversee Chinese Investments,” Jerusalem Post, 30.10.2019, https://www.jpost.com/Israel-News/Under-US-pressure-Israel-okays-mechanism-to-oversee-Chinese-investments-606326