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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.