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Economic Trends in Israel
 General
data
 Product and employment
 Balance of payments and external stability
 Fiscal policy
 Monetary policy and inflation rate
Economic Trends in Israel
 General
data
 Product and employment
 Balance of payments and external stability
 Fiscal policy
 Monetary policy and inflation rate
General data
Level of technology
2. Level of education
1.
General data
Level of technology
2. Level of education
1.
Expenditure on Civilian R&D as percent of the GDP
in Israel and in OECD Countries, 2001
5 4.5
4.1
4
3
2
1
3.4
3.1 3.0
2.8
2.6
2.4 2.3
2.2
2.0 2.0 1.9
1.6 1.6 1.6 1.5
1.3 1.2
1.1 1.0
0.9 0.8
0.7
Is
Sw rae
ed l
Fi en
nl
Ic and
el
an
Ja d
p
Sw K an
itz ore
e a
G rla
er nd
m
an
y
D US
en A
m
Fr ark
an
B
N el ce
et gi
he um
rl
an
ds
N UK
or
C wa
C A an y
ze u ad
ch s t a
R ral
ep ia
ub
Ir lic
el
an
N
ew I t d
Z aly
el
an
Sp d
Po a
rt in
u
G gal
re
ec
e
0
Israel is a leader in technology fields and ranks first in the percent of its GDP that it invests
in R&D.
ICT Product out of total business
sector product, 1997
OECD
USA
UK
Sweden
Portugal
Norway
Netherlands
Korea
Japan
Italy
Israel
Hungary
Germany
France
Finland
Czech Republic
Canada
Belgium
Austria
Australia
7.4
8.7
8.4
9.3
5.6
6.4
5.1
10.7
5.8
5.8
12.9
9.2
6.1
5.3
8.3
4.7
6.5
5.8
6.8
4.1
0
2
4
6
8
10
12
Israel ranks first in its proportion of ICT production in total business sector
product.
14
General data
Level of technology
2. Level of education
1.
Percent of population with 12 or more
years of schooling, ages 25-64, 1999
100
90
80
70
60
50 51
50
43
36
40
30
56 56 57 58
67
61 62 65
85 87
82
81
81
80 80
77
76
74
72 74
22
20
10
Po
rt
ug
Sp al
ai
n
I
G tal
re y
Ire ece
l
Lu Ice and
xe la
m nd
B bu
e rg
A lgiu
us m
tra
lia
O
EC
U
D Fra K
av nc
er e
a
K ge
N F ore
ew in a
Ze lan
al d
A and
us
tri
I a
Sw sra
e
D ed l
en en
m
C ar
a
G na k
er d
m a
Sw J an
itz ap y
er an
N lan
or d
w
ay
U
SA
0
One measure of the country’s level of education is the percent of its population that has at
least twelve years of schooling. By this measure, Israel ranks rather high by international
standards.
Economic Trends in Israel
 General
data
 Product and employment
 Balance of payments and external stability
 Fiscal policy
 Monetary policy and inflation rate
Product and Employment
1.
2.
3.
4.
5.
Domestic growth rate
GDP Per-capita – international comparison
Factors affecting growth
Characteristics of growth
Unemployment and the labor market
Product and Employment
1.
2.
3.
4.
5.
Domestic growth rate
GDP Per-capita – international comparison
Factors affecting growth
Characteristics of growth
Unemployment and the labor market
GDP Growth
QoQ,at annual rate
10.9%
12% 10.1%
11.6%
7.9%
7.1%
5.5% 6.1%
7%
5.7%
2.7%
2%
7.5%
7.4%
0.4%
3.8%
3.6%
2.5%
1.0%
0.8%
4.2%
-0.3%
-3%
-0.1% -0.5%
-0.6%
-2.3%
-2.6%
-4.1%
-4.4%
1.5%
-3.0%
-4.6%
-5.8%
-8%
1996
1997
1998
1999
2000
2001
2002
2003
The growth rate is expressed as the rate of quarter-on-quarter change in annual terms. In 1999–2000,
Israel had a very vigorous growth rate relative to the economy’s past performance and by international
standards. Since October 2000, the growth rate has been declining due to the global economic
slowdown, which has dampened demand for the high-tech products on which the Israeli economy
relies. the decline on the Nasdaq index, which reduced investments in Israeli start-up companies and in
high-tech industry at large, and due to the adverse effects of Palestinian terrorism on tourism,
construction, agriculture, and exports to the Palestinian Authority areas. The tight monetary policy has
been an additional impediment to growth. In 2002, a slump in private consumption caused the negative
effects to spread to a larger number of industries. The growth rate in the first quarter of 2003 is mainly
a reflection of an upturn in exports and a downturn in imports. The reversal of this trend in the second
quarter contributed to the contraction of GDP that occurred then.
GDP/Person Growth
annual percent change
6%
Average 1987-2000: 2.0%
3.7%
3.4%
4%
2%
4.6%
4.3%
1.8%
3.2%
2.6%
1.9%
0.9%
1.0%
0.8%
0.2%
0.2%
0%
-0.1%
-0.1%
-0.9%
-2%
-4%
-2.8%
-3.2%
Average
2003:
-2.3%
1987 1988 1989 1990 1991 1992 1993 1994
1995 2001
1996 -1997
1998
1999 2000 2001 2002 2003 2004
GDP per capita is an indication of a country’s standard of living. Israel’s per-capita GDP
declined in 2001-2003 by 7% in cumulative terms. This is an unprecedented decline in the
standard of living. A modest increase in GDP per person is projected for 2004, the first year
after three consecutive years of decline.
Product and Employment
1.
2.
3.
4.
5.
Domestic growth rate
GDP per-capita – international comparison
Factors affecting growth
Characteristics of growth
Unemployment and the labor market
IC U.
S
N ELA .A.
SW O N
R
IT IRE W D
ZE L AY
O
E
RA
D
C
E LAND
D N
(w ET CNM ND
ei H A AR
gh E N K
te RL AD
d A A
by N
D
AUAU po S
S
ST TRp.)
B R IA
G EL AL
E G IA
R IU
M M
JA AN
P Y
FI ITAAN
SWNL LY
A
E ND
D
E
FR U N
C AN.K.
Y C
P
N
I
SRRUE
E
W
A S
ZE SP EL
AL AI
G
PO R ANN
E D
SLRT EC
O UG E
VE A
L
C KO NI
ZE R A
C EA
M
H AH R
SLUN LT .
O GA A
ESVA RY
K
POTO R.
LI
N
TH LA IA
C UA ND
R N
M OA IA
E TI
X A
L
BU A IC
R L TV O
M US GA IA
A S R
C IA IA
E
R DON F
O N .
M
TU ANIA
U R IA
K K
R E
AI Y
N
E
GDP/person (PPP-adjusted),
index (USA = 100), 2001
120
100
100
80
60
40
20
88 87 86
86 85
77
7979
80
78 75 74 74 72
73 72
OECD
other countries
71 71
59
59 59 58
53 5250
44 42
39 37
34
28
29
26 26 25 23
21 20
18 17 16
In 2001, per-capita GDP was lower in Israel than in the U.S. and most Western European
countries, but higher than in many OECD countries. Israel’s per-capita GDP in 2001 was
75% of the OECD average and 59% of the U.S. level.
12
0
Product and Employment
1.
2.
3.
4.
5.
Domestic growth rate
GDP Per-capita – international comparison
Factors affecting growth
Characteristics of growth
Unemployment and the labor market
The U.S. Economy, 1995-2002
real growth rates of GDP and business investment
15%
12.2%
10%
9.8%
12.5%
10.0%
8.1%
5%
2.7%
3.6%
4.4%
4.3%
4.1%
7.8%
3.8%
2.5%
2.0%
0.3%
2.3%
0.9%
0%
-1.4%
-5%
-5.2%
-5.7%
-10%
1995
1996
GDP
1997
1998
1999
2000
2001
2002
2003Q1 2003Q2
Private Nonresidential Fixed Investment
The domestic slowdown in 2001 and 2002 was affected by the growth slowdown in the U.S.
and by the composition of the GDP decline there. In the main, a downturn in investments
by American firms led to a decrease in demand for Israeli exports, which are heavily tilted
in the direction of these products. American corporate investments increased in the second
quarter of 2003, although more slowly than GDP.
World Growth
(weighted average: US - 44%, Euro area - 37%, Japan - 4%, UK 8%, Asian NIEs - 7%)
4.5
3.9
4
3.5
3.6
3.6
3.2
2.9
3
3.6
Proj.
3.0
2.9
2.8
2.5
2
1.8
1.7
2002
2003
1.5
0.9
1
0.5
0
19841993
1994
1995
1996
1997
1998
1999
2000
2001
2004
The slowdown in Israeli exports was influenced by the slump in global growth. The growth
rate of global GDP was calculated as a weighted average in terms of its share in Israeli
exports. Current projections are that the global growth rate will recover in 2004 (relative to
2001 - 2003) but will be lower than in the past.
The Nasdaq Index and Investment of VCs in Start Ups
in the U.S. and in Israel
5,000
1200
Nasdaq
4,500
1000
US (X28)
4,000
Nasdaq Index
(US$ millions)
Israel
800
3,500
3,000
600
2,500
400
2,000
200
1,500
1,000
0
1997
1998
1999
2000
2001
2002
2003
The steep decline in the Nasdaq index in 2000–2002 had a severe downward effect on
capital raised by VC funds. This, in turn, dampened investments in Israeli and American
start-up companies. The decline accounts for much of the blow inflicted on high-tech and
the domestic economic slowdown that began in late 2000. The Nasdaq index recovered
somewhat in the first half of 2003, although it is lower than in the past.
Tourist Arrivals
thousands per month
220
Palestinian
Terrorist
Attacks
Pope visit
200
180
160
140
120
100
Terrorist
Attacks
80
60
40
Attack on the
Achille Lauro
Intifada
20
0
1984
Sep
11th
Terrorist attack in
Netanya, march 2002
War in Iraq
Gulf War
1986
1988
1990
1992
1994
1996
1998
2000
2002
The global and domestic security situation has depressed Israel’s number of inbound tourists by some
55% relative to the early-2000 level. The share of tourism in GDP has fallen from more than 3% before
the beginning of the Intifada to about 1% of GDP today. Tourism has recovered in the past few months,
due to some improvement in the security climate and the effects of the end of the war in Iraq. However,
the level of tourism is still lower than that preceding the eruption of Palestinian terror offensive.
Person-Nights at Hotels
thousands per month
1200
1000
Tourists
Israelis
800
600
400
200
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
The adverse effects on tourism were eased somewhat by promotions that aimed to
encourage Israeli tourists to replace foreign ones.
The Short-Term Real Interest Rate
(Derived from the Bank of Israel’s key lending rate)*
8%
7.0%
7%
6.6%
5.9%
5.7%
6%
4.7%
5%
4.8%
4.8%
4.2%
3.6%
4%
3%
2.0%
2%
1%
1.0%
0.9%
0%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
* Discount Rate Deflated by Implicit Inflation Expectations
Contractionary monetary interest rates in 2001–2003 contributed to the
deceleration of GDP growth and delayed recovery from the recession.
Jan-Jul
2003
Product and Employment
1.
2.
3.
4.
5.
Domestic growth rate
GDP Per-capita – international comparison
Factors affecting growth
Characteristics of growth
Unemployment and the labor market
Industrial Production Index
140
135
annual averages
130
125
120
115
110
105
1996
1997
1998
1999
2000
2001
2002
2003
The slowdown is reflected in a decline in industrial production from late 2000 to the end of
2001. In 2002 and in the first half of 2003 industrial production has been stable at the new
low level.
Private consumption expenditure
72
PRIVATE CONSUMPTION EXPENDITURE (NIS BILLIONS, 2000 PRICES, s.a.)
PRIVATE CONSUMPTION EXPENDITURE AS PERCENT OF GDP
70
67.2 67.3
68
68.4
68.0 68.1 68.1 68.0 68.1 68.0 67.7 67.7
66.7
65.3
66
63.9
64
62.1 62.4
62
`
59.9
60.6
59.3
60
57.4
58
56
54
57.5 58.2 59.1 59.4 59.3
56.2 55.9 56.6 55.9 56.2 56.0 56.1 56.8
1999
2000
2001
2002
59.2 58.7
58.9
2003
In 2001, despite the economic slowdown, private consumption increased in absolute terms
and as a share of GDP. In 2002, private consumption declined moderately as the duration of
the recession prompted households to adjust their estimates of permanent income
downward. This trend continued and accelerated in the first quarter of 2003. In the second
quarter, due to the temporary improvement in the security situation and the optimism that
followed the end of the war in Iraq, private consumption increased impressively.
Commerce and Services Sectors
real monthly revenue
150
140
130
120
110
100
90
1996
1997
1998
1999
2000
2001
2002
2003
Monthly revenues in trade and services declined in 2002 and in the first half of 2003 after
recording no change in 2000 and 2001. These developments reflect an adjustment to
changes in private consumption.
Gross capital formation
(NIS millions, 2000 prices)
120,000
7,004
100,000
7,336
Inventories change
Fixed assets
4,279
928
8,429
5,111
4,723
2,033
80,000
60,000
40,000
88,251
96,310
95,481
92,117
91,628
92,847
88,400
80,420
20,000
0
1995
1996
1997
1998
1999
2000
2001
2002
Fixed investment decreased by 9 percent in 2002 after a 5 percent decline in 2001. Most
industries in the business sector participated in the decline, which reflects security and
economic uncertainty, the global economic slump, and domestic monetary restraint.
Housing Starts and Fixed Investment
in residential construction
Housing starts, housing units per quarter
Fixed investment in residential consruction, seasonaly adjusted
9,000
8,000
20,000
7,000
6,000
15,000
5,000
4,000
10,000
3,000
2,000
5,000
1,000
20
03
20
02
20
01
20
00
19
99
19
98
19
97
0
19
96
19
95
0
NIS millions per quarter(2000 prices)
25,000
Housing starts attest to the trend of future activity, since homebuilding lasts about a year
and a half. Housing starts declined from mid-2000 until the first quarter of 2003, and then
increased slightly in the second quarter.
Real Change in Domestic Demand
(excl. defense imports)
14%
11.6%
12%
10%
8.0%
8%
6%
4.1%
7.6%
6.0%
4.8%
6.0% 6.0%
Proj.
4.2%4.2%
4%
2%
2.6%
0.5%
1.3%1.2%
1.4%
0%
-1.0% -1.3%
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
-2%
Domestic demand (excl. defense imports) decreased by 1.0 percent in 2002 after rising by
1.4 percent in 2001. Domestic demand is expected to decline by about 1.3 percent in 2003
and to increase by 2.6 percent in 2004 (composed of a 1.2 percent increase in private
consumption, a 1.8 percent upturn in fixed investment, and a 2.9 percent decline in public
consumption).
Structure of Industrial Exports
25,000
20,000
traditional industries
hi-tech industries
4,870
US$ millions
4,704
23%
24%
15,000
10,000
0
5,013
26%
26%
4,278
35%
5,000
4,731
7,877
15,976
14,847
13,466
14,091
77%
76%
74%
2001
2002
74%
65%
1995
2000
2003*
*Jan-Aug at annual rate
The recession is also reflected in a decline in exports since 2000. In 2002, exports of traditional
industries did not decline. However, high-tech exports decreased both in absolute terms and in percent
of GDP. There was a moderate recovery in the first eight months of 2003 relative to the 2002 average,
reflecting the effect of the real currency depreciation against the currency “basket,” the effect of the
decline in real wages, and efficiency gains in the business sector.
Net Inflows of Foreign Investment
US $ billions
13
FDI
11
Portfolio Investment
9
Other Investment
Total
7
5
3
1
-1
*Jan-Jul at annual rate
-3
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002 2003*
Due to the global economic slowdown, the Nasdaq crisis, and the security situation, net
foreign investment (direct investments in Israeli enterprises, portfolio investments, and
other) declined from $11.7 billion in 2000 to $2.0 billion in annual terms in the first seven
months of 2003, and net direct investment in Israeli enterprises (FDI) declined from $5.0
billion in 2000 to about $1.6 billion 2002 but increased in the first seven months of 2003 to
$3.5 billion in annual terms.
Product and Employment
1.
2.
3.
4.
5.
Domestic growth rate
GDP Per-capita – international comparison
Factors affecting growth
Characteristics of growth
Unemployment and the labor market
Employee Posts and the Unemployment Rate
2,400
12%
Employees, thousands
right axis
11%
2,300
10.8%
10%
10.5% 10.2%
2,200
10.4%
9%
10.3%
2,100
10.3%
8%
9.6%
Unemployment rate
left axis
7%
10.6%
2,000
8.8%
1,900
6%
1995
1996
1997
1998
1999
2000
2001
2002
2003
The recession in 2001–2002 is also manifested in an increase in the unemployment rate,
from 8.8% in the second half of 2000 to 10.6% in the second quarter of 2003. The
unemployment rate depends on the growth rate, wage developments, the number of nonIsraeli workers, and Government’s labor and transfer-payment policy.
18%
16%
14%
Non-Israelis employed in the Business Sector
Percent of total employees
Territories Workers
Foreign Workers
12%
10%
8%
6%
4%
2%
0%
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Non-Israelis (Palestinians and foreign workers) account for 14% of persons employed in the
domestic business sector. The proportion has been rising gradually since the early 1990s,
partly due to the replacement of Palestinian workers in response to security quarantines.
Israel ranks second in the world in the share of foreign workers in its employed labor force
(after Switzerland, where the unemployment rate is very low). The number of foreign
workers is having a serious effect on unemployment and on inequality in income
distribution.
Real wages (CPI-adjusted)
index (1999=100)
115
110.1
110
106.6
108.1
105
103.4
105.4
100.0
102.7
100
100.0
Real wages - government sector
95
99.2
97.2
Real wages - business sector
90
1999
2000
2001
2002
Jan-Jun 2003
The economic slowdown was reflected in a decline in average real wages in the business
sector and the public sector in the first six months of 2003 relative to 2002, following a
Israeli and Non-Israeli Employees in Construction
thousands
170
160
123.9
150.5
150
130
123.7
110.8
120
119.5
103.3
146.7
110
140
100
95.2
87.1
130
131.4
120
Israeli
Non-Israeli
110
90
80
120.4
116.6
117
118.7
100
70
60
1996
1997
1998
1999
2000
2001
2002
The issue of substitution between Israeli and non-Israeli workers is reflected in the
construction industry, where the advent of foreign workers has pushed wages
down, made construction work less attractive to Israeli workers, and lowered the
number of Israelis in the industry. In 2001 and 2002, employment of Israelis in
construction increased somewhat even though the construction industry was mired
in a severe recession. This is due to a decline in the Palestinian labor force after the
onset of the terror attacks and the decline in the number of foreign workers during
Participation rate of Men ages 25-54, 2000
100
98
97
96 97
96
96
96
94
92
92 92 92 92
92
91
91
91 91
90 90 91
92
93 93 93
94 94 94
94 94
89
90
88
86
84
84
Is
T rae
A urk l
us e
tr y
al
ia
I
t
Sw a l
e y
Fi den
n
N C la n
ew a d
n
Z ad
ea a
N lan
o
D rw d
en a
m y
ar
U k
SA
Ir UK
el
a
K nd
B ore
el a
O
E Po giu
C r m
D tu
av ga
er l
ag
Sp e
N Au ain
et s
he tr
rl ia
a
L Fr n d s
ux a
em nc
bu e
G r
G ree g
er ce
m
Ic an
el y
Sw M and
itz exic
er o
la
J a nd
pa
n
82
One reason for the lower standard of living in Israel than in Western Europe and the U.S. is
that Israel has a low labor-force participation rate, especially among men. This is due to a
low participation rate among the ultra-Orthodox, to the large population of foreign workers
who depress wage levels in industries such as construction and agriculture, making them
unattractive to Israelis, and to the level of transfer payments.
Economic Trends in Israel
 General
data
 Product and employment
 Balance of payments and external stability
 Fiscal policy
 Monetary policy and inflation rate
Balance of Payments and
External Stability
1.
2.
3.
Balance-of-payments
Foreign reserves
External Debt
Balance of Payments and
External Stability
1.
2.
3.
Balance-of-payments
Foreign reserves
External Debt
The Current Account
millions of dollars & percent of GDP
1000
1%
0.3%
0
0%
0.5%
-1000
-0.5%
-0.6%
-2000
-2.1%
-1.3%
-1.3%
-1.5%
-1.2%
-1.6%
-3000
-1%
-2%
-3%
-3.9%
-3.6%
-4000
-4%
-4.4%
-5000
-5%
Percent of GDP
-5.6%
-5.5%
1
Q
220
03
20
02
20
02
Q
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
-6%
19
90
19
89
-6000
The current account of the balance of payments is the net balance of total export receipts
less total payments for imports of goods, services, and factors, and unilateral transfers
(including the American grant in aid). This is the most important indicator of the state of
the economy vis-a-vis the rest of the world in terms of imports and exports. The currentaccount deficit in the past 12 months (ending in March 2003) has been 0.5% of GDP. This
is lower than the 6% level observed in the mid-1990s and is low by international standards,
indicating that the balance of payments does not pose a threat to the Israeli economy.
Balance of Payments and
External Stability
1.
2.
3.
Balance-of-payments
Foreign reserves
External Debt
External Reserves
45,000
40,000
11
In Months of Imports
(of goods and nonfactor services)
9
35,000
30,000
7
25,000
5
20,000
15,000
3
10,000
1
5,000
In Millions of US Dollars
-1
30
31
D
ec
86
Se
p
30 87
Ju
31 n 88
M
a
31 r 89
D
ec
30 89
Se
p
30 90
Ju
31 n 91
M
a
31 r 92
D
ec
30 92
Se
p
30 93
Ju
31 n 94
M
a
31 r 95
D
ec
30 95
Se
p
30 96
Ju
31 n 9
M 7
a
31 r 98
D
ec
30 98
Se
p
30 99
Ju
31 n 00
M
a
31 r 01
D
ec
30 01
Se
p
30 02
Ju
n0
3
0
The reserves include foreign currency held by the Bank of Israel in short-term
accounts abroad (mainly U.S. Treasury bills). Israel’s reserves are high both by
international standards and in terms of months of imports. This assures Israel’s
ability to finance its liabilities in the short term and to meet its import needs, and it
corroborates the assessment of the low probability of a balance-of-payments crisis.
Balance of Payments and
External Stability
1.
2.
3.
Balance-of-payments
Foreign reserves
External Debt
External Debt, Gross and Net
(percent of GDP, end-period)
120
Debt liabilities
Debt assets
Net debt
100
80
64.0
60
40
20
0.6
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
0
Israel’s net external debt (total debt liabilities less debt assets) was 0.6% of GDP at
the end of December 2002. This is a lower level than in the past, giving further
evidence of the improbability of a balance-of-payments crisis.
Economic Trends in Israel
 General
data
 Product and employment
 Balance of payments and external stability
 Fiscal policy
 Monetary policy and inflation rate
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of Public
Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of Public
Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
General Government Expenditure
(as percent of GDP)
60%
58% 57.1% 57.6% 57.0%
56.1%
55.5%
55.3% 55.1%
56%
53.9%
53.4%
54%
54.0%
53.4%
52.6%
51.4%
52%
50%
48%
46%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Government expenditure as a share of GDP increased in 2001 and 2002 due to the recession
(which reduced GDP) and the need to increase the defense budget despite cutbacks in other
public expenditure.
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of
Public Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
The Real Change in General Government Expenditure*
10%
* Nominal change deflated by business-sector GDP deflator
Total
8%
Excl. interest, defense imports, and capital transfers abroad
6.8%
6.4%
6.0%
6%
6.1%
5.5%
5.4%
4%
2.6% 2.6%
2.7%
2.3%
2%
0.8%
0.3%
-0.5%
0%
Average
1996-2000
1996
1997
0.1%
1998
0.3%
0.5%
1999
2000
2001
2002
-2%
Real public expenditure increased by 2.7 percent in 2002 after rising by 5.5 percent in 2001
and by 2.6 percent on annual average in 1996–2000. The relatively mild upturn in total
public expenditure despite the rapid increase in public consumption is partly explained by
restraint in expenditure for transfer payments to households, which blunted the rapid
escalation of public expenditure.
The Real Change in General Government Expenditure
on consumption, support payments, and current transfers*
* Nominal change deflated by business-sector GDP deflator
12%
Consumption (excl. defense imports)
Support payments and current transfers
10%
9.0%
8.7%
7.5%
8%
7.3%
6.1%
6%
5.1%
4.8%
4%
3.0%
2.9%
4.8%
3.2%
1.7%
1.2%
2%
-0.6%
0.2%
0%
-0.3%
-2%
average
1996-2000
1996
1997
1998
1999
2000
2001
2002
Public expenditure (excl. defense imports) recorded a significant 4.8 percent increase in
2002, after upturns of 5.1 percent in 2001 and 2.9 percent on annual average in 1996–2000.
Most of the increase traces to greater defense outlays, but civilian consumption also rose.
The Real Change in Public Consumption Expenditure*
*Nominal change deflated by business-sector GDP deflator
13%
10.9%
11%
8.7%
9%
5%
3%
6.8%
6.8%
7%
3.2%
2.3%
6.8%
3.4%
3.3%
1.8%
0.6%
1%
-1%
0.0%
-0.1%
-1.3%
-0.1%
-1.5%
-3%
average
19962000
1996
1997
1998
Civil consumption
1999
2000
2001
2002
Domestic defense onsumption
Civilian consumption increased perceptibly in 2000 and 2001 and less vigorously in 2002. In
contrast, domestic defense consumption leaped in 2002.
The Real Change in Support Payments
and Current Transfers*
* Nominal change deflated by business-sector GDP deflator
17%
12%
7%
10.2%
Current transfers to households
Other support payments and current transfers
9.2%
9.8%
6.0%
4.6%
4.5%
4.2%
2.4%
2.0%
2%
0.2%
-0.4%
-3%
-2.9%
-8%
-3.8%
-7.3%
-7.2%
-8.1%
-13%
average
1996-2000
1996
1997
1998
1999
2000
2001
2002
Subsidies and transfer payments to households increased considerably in 2000 and
2001. In 2002, subsidies and transfers to households were basically unchanged and
other subsidies and transfers decreased sharply.
The Change in Government Sector's Real
Wages* and Number of Employees
* Nominal change deflated by business-sector GDP deflator
10%
Employees in government sector
8%
Real wage in government sector
6.0%
6%
5.2%
4.4%
4%
3.4%
3.2%
3.0%
2.9%
2.3%
2%
2.6%
2.5%
3.2%
0.9%
0%
-0.9%
-2%
-1.6%
-2.5%
-2.6%
-4%
average
1996-2000
1996
1997
1998
1999
2000
2001
2002
General-government employment expanded in 2001 and 2002. In contrast, real
wages increased in 2001 but retreated by a similar increment in 2002.
Public Expenditure & Current Transfers to Households
)as percent of GDP(
18%
17%
16%
48%
current transfers to households
46.9%
46.4%
other expenditure by the general
government
45.3%
15%
43.4%
12.1%
42.9%
46%
13.4% 45%
44.3%
14%
13%
47%
46.3%
42.0% 12.1%
44%
13.3%
43%
12.2%
12%
11%
10%
9%
42%
11.6% 11.8%
11.2%
10.8%
10.7%
10.7%
10.7%
10.4%
42.3%
41.2%
40.8%
41%
40%
40.3%
39.2%
8%
39%
38%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Since 1990, public expenditure (excl. transfer payments) has declined by 4% of GDP and transferpayment outlays have risen by 3% of GDP. Israel’s current transfer payments, which are high in
historical terms and by international standards, are a disincentive to participating in the labor force
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of Public
Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
Public Expenditure,
as percent of GDP, 2001
60
50
54
53
51
51
49
48
46
46
45
45
41
40
41
41
39
38
38
38
37
33
30
30
30
20
10
U
SP K
C AIN
A
NA
D
A
J
A
AP
U
ST AN
R
AL
IA
IR US
EL A
AN
D
IS
R
SW AE
L
ED
G EN
R
EE
F R CE
D AN
EN C
M E
A
R
A
K
U
ST
BE R
LG IA
G
ER IUM
M
A
N
IT Y
A
N
ET FIN LY
H LA
ER N
LA D
N ND
O
S
PO RW
R A
LU TU Y
X
EM GA
L
BU
R
G
0
Israel’s level of public expenditure relative to GDP is high by international standards, for
reasons that include large defense outlays.
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of Public
Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
The Budget Deficit
as percent of GDP, includes foreign deficit,
excludes net lending and Bank of Israel’s realized profits
8%
Proj.
7%
6.0%
6%
5%
Deficit
Target
4.5%
4.3%
4.2%
4%
3.3%
3.3%
4.0%
3.8%
3.4%
3%
2%
0.7%
1%
0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
The domestic activity recession, coupled with a steep decline in wages and private consumption and a
much lower price level than the inflation targets, have caused tax revenues and other government
revenues to decline sharply and led to a 2003 budget deficit that is expected to come to 6 percent of
GDP. The planned deficit in 2004 will be 4 percent of GDP, 2 percentage points lower than the 2003
level. In 2005–2010, government expenditure in each fiscal year will not surpass expenditure in the
preceding fiscal year by no more than 1 percent, and in any case the deficit shall not exceed 3 percent
of GDP.
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of Public
Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
Public Debt and Government Debt
1986-2002
(percent of GDP)
180
170
Public Debt
Government Debt
167
160
150
148
152
154
145
140
130
120
110
100
129
124
124
116
109
107
104
107
105
101
97
92
90
80
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Public debt is the result of all public deficits amassed in the past. In the mid-1980s, after the
Economic Stabilization Program, public debt as a share of GDP began to decline on a
downtrend. In 2000, the public debt was 92% of GDP. Due to the increase in the budget
deficit and the decline in GDP, the ratio of public debt to GDP climbed to 97% in 2001 and
105% in 2002.
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of Public
Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
Is
r
G ael
re
Sw ece
ed
en
Ita
ly
Ca UK
n
Be ada
lg
i
Fi um
nl
an
Sp d
Po ain
rtu
Fr gal
A anc
us e
tra
A lia
us
tri
N
et U a
he SA
r
G land
er s
D man
en y
m
Ire ark
la
n
Ja d
N pan
O orw
EC a
D y
av
g
Public Debt as percent of GDP
140
120
80
98.1
1995
2001
100
65.7
60
40
20
Israel’s public debt in terms of percent of GDP is larger than that in most OECD
countries.
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of Public
Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
The Gross Tax Burden
as percent of GDP
42%
Includes direct, indirect, and capital taxes, social security and health
fees; data before 1995 include an adjustment of 1 percent of GDP to
account for a change in definitions.
41%
40.5%
40.0%
40%
40.0%
39.6%
39.5%
39.3%
40.3%
40.0%
39.9%
39.6%
38.8%
39%
40.5%
38.7%38.8%
38%
37%
36%
1989 1990 1991 1992 1993 1994 1995
1996 1997 1998 1999 2000 2001 2002
In 2002, due to the recession, the share of taxes in GDP declined even though the
rate of VAT was raised to 18 percent, the income ceiling for National Insurance
contributions and health tax was revoked, employers’ indemnification was
reduced, and taxes were imposed on fuel, cigarettes, and employer-owned cellular
telephones.
Fiscal Policy
1.
2.
3.
4.
5.
6.
7.
8.
Public expenditure
Analysis of Changes in the Components of Public
Expenditure
Public expenditure – international comparison
Budget deficit
Public debt and government debt
Public debt – international comparison
Tax burden
Tax reform
Marginal tax rate on labor income, before and
after the tax reform
70%
Before tax reform
60%
50%
40%
After tax reform
30%
20%
10%
Monthly income, NIS
0%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Due to the tax reform, the marginal tax rate on labor income (including income tax,
National Insurance contributions, and health tax) will fall incrementally from 2003
until the final level of 49% is attained. The March 2003 economic plan moved up the
phases of the reform and will complete the reform in January 2006 instead of January
2008.
Economic Trends in Israel
 General
data
 Product and employment
 Balance of payments and external stability
 Fiscal policy
 Monetary policy and inflation rate
Monetary Policy and Inflation Rate
1.
2.
3.
4.
Inflation process
Inflation targets
BOI real interest rate
Real interest rate and real effective
exchange rate
Monetary Policy and Inflation Rate
1.
2.
3.
4.
Inflation process
Inflation targets
BOI real interest rate
Real interest rate and real effective
exchange rate
550%
Inflation
1970-2003
450%
350%
250%
150%
50%
Proj.
0%
-50%
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
Due to the successful implementation of the Economic Stabilization Program, inflation
declined from triple digits in the 1980s to Western levels.
Annual inflation, 1986-2003
(end-of-period)
24%
20%
20.7%
19.7%
18.0%
16.1%
17.6%
16.4%
16%
12%
14.5%
11.3%
9.4%
10.6%
8.1%
7.0%
8.6%
6.5%
8%
4%
1.3%
1.4%
0.0%
-1.1%
0%
-4%
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Aug
03
Inflation since 1999 has been close to zero. Inflation in 2002 reflects a nonrecurrent increase in prices
and not an inflationary process. The price increase took place due to an exchange-rate depreciation
after several years of high interest rates that held such an adjustment at bay. Inflation in the past
twelve months (ending in August 2003) was minus 1.1 percent. The Bank of Israel is expected to
undershoot inflation target again this year.
Monetary Policy and Inflation Rate
1.
2.
3.
4.
Inflation process
Inflation targets
BOI real interest rate
Real interest rate and real effective
exchange rate
12–month Changes in the CPI
and Annual Inflation Targets
12%
10%
8%
6%
4%
2%
-1.1%
0%
-2%
-4%
1996
1997
1998
1999
2000
2001
2002
2003
In recent years, the Bank of Israel has applied an overly tough monetary policy.
Consequently, inflation in the past few years has been lower than the government’s
inflation targets, except for 2002, when it was higher. In 1999–2003, cumulative
inflation was 9.5% ( assuming zero inflation in 2003) as against a cumulative
target of 15.9%.
Monetary Policy and Inflation Rate
1.
2.
3.
4.
Inflation process
Inflation targets
BOI real interest rate
Real interest rate and real effective
exchange rate
The Short-Term Real Interest Rate
(Derived from the Bank of Israel’s key lending rate)*
8%
7.0%
6.6%
7%
6.8%
6.3%
5.7%
6%
4.8%
4.7% 4.8%
4.2%
5%
5.3%
4.6%
4.2%
4%
6.3%
6.1%
5.8%5.5%
5.5%
5.3% 5.3%
5.8%
5.6% 5.6%
5.4%
4.2%
7.0%
6.8%
6.7%
5.5%
5.3%
4.6%
4.6%
3.6%
3.2%
3%
2.6%
2.0%
2%
1.6%
1.7%
1.1%
1.0%
1% 0.9%
1.9%
0.5%
0.1%
20
Ja 02
n
20
M 01
ar
2
M 001
ay
20
0
Ju 1
l2
0
Se 01
p
2
N 001
ov
20
Ja 01
n
20
M 02
ar
2
M 002
ay
20
Ju 02
ly
20
Se 02
p
2
N 002
ov
20
Ja 02
n
20
M 03
ar
2
M 003
ay
20
Ju 03
ly
20
03
20
00
19
98
19
96
19
94
19
92
0%
Annual averages
* Discount Rate Deflated by Implicit Inflation Expectations
The BOI real interest rate was in recent months at very high rates in view of the
economic slowdown and the absence of inflationary pressures.
Monetary Policy and Inflation Rate
1.
2.
3.
4.
Inflation process
Inflation targets
BOI real interest rate
Real interest rate and real effective
exchange rate
BOI’s real interest rate and the real
effective exchange rate
8%
6%
17%
Real interest rate
REER
12%
4%
7%
2%
2%
0%
-3%
-2%
-4%
-8%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
BOI's real interest rate (discount rate deflated by implicit inflation expectations)
REER (real effective exchange rate - increase means real appreciation, decrease means real depreciation)
The monetary policy has kept real interest rates high and caused real currency appreciation
in 1999–2001. The real currency depreciation in 2002 reflects an exchange-rate adjustment
in response to real shocks that the economy experienced after October 2000. The
adjustment, which became possible after the steep rate cut at the end of 2001, led to severe
depreciation in the first half of 2002. Afterwards, the exchange rate leveled off.