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2020 OECD ECONOMIC SURVEY OF ISRAEL 23 September 2020, Jerusalem and Paris

Towards an inclusive recovery

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Key messages  Maintain exceptional support for households and firms and expand support if needed  Help the unemployed transition to new jobs by boosting retraining and job-search assistance  Improve skills, infrastructure and competition to foster the recovery and promote equal opportunities for everyone  Tax reforms can ensure a more inclusive and environmentally sustainable recovery 2

The Israeli and the global economy have experienced a severe shock

Most countries will experience a deep recession in 2020 Projected real GDP growth, % 2020

*Fiscal year starting in April. Source: OECD Interim Outlook, including estimates for Israel . 4

Israel is facing a second outbreak of the pandemic

Notes: The figure refers to year 2020 Source: OECD calculations based on Ourworldindata.

The COVID-19 crisis threatens to reverse progress made in boosting living standards

Note: The GDP and unemployment figures for 2020 are forecasts. Source: OECD Economic Outlook 107 database, including more recent information. 6

The labour market has been severely hit

1. Series includes persons not in the labour force who stopped working due to dismissal or closure of the workplace since March. Data not available before March 2020. 2. This includes employees on unpaid leave, employees who were absent during the week due to reduced workload, work stoppage or other reasons related to the pandemic and excludes quarantined persons. Source: Israel Central Bureau of Statistics.

Inflation has fallen into negative territory Inflation Y-o-y % changes

Note: Shaded area is the Bank of Israel's inflation target range (i.e. 1%-3%). Source: Bank of Israel.

Low public debt has provided fiscal space Government debt As % of GDP

Source: OECD Economic Outlook 107 database, including more recent information. 9

Active labour market policies could be stepped up Total spending on active measures Per unemployed, as a % of GDP per capita

Note: 2017 for all countries, 2015 for Italy. Source: OECD Labour Market Programmes database; and OECD National Accounts Statistics database.

Main policy recommendations to promote economic stability  Continue to provide fiscal support to buttress the recovery.  Enhance active labour market policies to help the unemployed transition to new jobs.  Maintain a supportive monetary policy stance, and stand ready to further expand existing programmes, if financial conditions tighten  Continue providing temporary liquidity support to firms as long as needed to avoid widespread bankruptcies. 11

 Create a deposit insurance system and a bank resolution framework to further enhance financial stability.

The COVID-19 crisis threatens to exacerbate Israelâ€™s structural challenges

Productivity gains are slow Productivity gap Gap to the upper half of OECD countries

Source: OECD, Going for Growth.

Productivity disparities across sectors are wide Israel/OECD relative productivity ratio 1.8 Higher 1.6 relative productivity 1.4 1.2 1 0.8 0.6 Lower 0.4 relative productivity 0.2 0

Source: Bank of Israel (2019), â€œIncreasing the Standard of Living in Israel by Increasing Labor Productivityâ€?.

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

Poverty is high, particularly among Israeli-Arabs and Haredim Relative poverty 2017ยน

1. The relative poverty rate measures the share of households whose income is below the threshold of 50% of median disposable income. 2018 data for Israel. Source: OECD Income Distribution database; National Insurance Institute (2019), Poverty and Social Gaps Report, 2018, Table 7. 15

Groups with weak socio-economic outcomes are concentrated in particular neighborhoods and towns Poverty rate %, 2018

Tel Aviv

Haifa

North

South

Jerusalem

Note: At-risk-of-poverty rate is defined as the share of people with an equivalised disposable income below the risk-of-poverty threshold, which is set at 50 % of the national median equivalised disposable income. Source: National Insurance Institute (2019), Poverty and social gaps Report 2018, Table 12. 16

Reforms are key to foster a strong, sustained and inclusive recovery

Reducing gaps in educational outcomes between different school streams PISA performance in mathematics, mean score

Source: OECD PISA database. 18

Addressing skill disparities among adults Variability in adult skills

Note: The measure of variability used is the inter-quartile range (difference between the third and first quartiles) of the distribution of numeracy scores (in the Survey of Adult Skills, PIAAC 2015). Source: OECD (2016), Skills Matter: Further Results from the Survey of Adult Skills.

Enhancing transport infrastructure to connect people to jobs

KOR

OECD

DEU

DNK

AUT

GBR

ISR

100 90 80 70 60 50 40 30 20 10 0

Total core infrastructure stock As % of GDP, 2015 Total core infrastructure stock, 2015 (percent of GDP).

100 90 80 70 60 50 40 30 20 10 0

Source: Office of the Accountant General, Ministry of Finance; ITF; GWI; IHS Global Insight; McKinsey Global Institute analysis; Israel Rail; Israel Airport Authority. 20

Improving product market regulations to foster competition

Note: The Product Market Regulation 2018 (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable. Scores range from 0 to 6 and increase with restrictiveness. Source: OECD Product Market Regulation database.

Reducing disparities across localities to promote equal opportunities for all The differences in overall revenues between municipalities after transfers

Note: Data for Estonia, Israel, Latvia, Lithuania and Sweden refer to 2017; data for Chile, Denmark, Finland, Italy, Norway and Spain to 2012. Source: H. Blöchliger (2014), "Fiscal equalisation - a cross country perspective", Paper prepared for the conference on “Fiscal Equalisation”, Berlin, 26-27 June, OECD (2019), “A review of local government finance in Israel: Reforming the Arnona system”, forthcoming; OECD (2020), "Fiscal equalisation - a cross country perspective" (forthcoming). 22

Boosting in-work benefits to support the poor and maintain work incentives Share of working poor %, 2017 or latest available year

Note: Working poor are those with income below the poverty line (50% of median disposable income), living in households with a working-age head and at least one worker. 2018 data for Israel. Source: OECD Income Distribution database.

Reducing road traffic intensity Road traffic intensity per network length 1000 vehicle-km driven/km, 2014 or latest year available

Source: OECD Economic Outlook 107 database.

Source: OECD (2015), Environment at a Glance 2015: OECD Indicators, OECD Publishing, Paris.

Policy recommendations to strengthen the recovery, boost productivity and reduce socio-economic disparities  Reduce gaps between different school streams by promoting teacher exchanges, increasing Hebrew courses in the Arab stream and strengthening the core subjects in the curriculum of the Haredi stream  Expand post-secondary vocational training targeted at groups with weak attachment to the labour market  Improve public transport services  Further cut tariffs and non-tariff barriers, and streamline trade regulations  Strengthen fiscal equalisation mainly through higher compensation from wealthier municipalities  Reduce the difference between non-residential and residential property tax rates 25

Tax policy recommendations to foster inclusive and sustainable growth  Consider expanding the earned income tax credit  Review the preferential tax treatment in the business tax system with a view to reduce distortions  Either introduce an economy-wide carbon tax or increase the existing excise tax on primary fuels  Introduce congestion charges  Reduce inefficient tax expenditures and broaden tax bases, including by reducing tax breaks on savings in the “advanced training funds” and streamlining VAT exemptions in the medium term

Overall, the recommended reform package can boost the recoveryâ€Ś Difference from baseline GDP per capita (no policy change) scenario by policy area % points

16 14 12 10

% points 16

Enhancing infrastructure Improving business regulation Education and labour market policies nnm

14 12 10

2040

2050

Source: OECD simulations based on OECD Economics Department Long-term Model. 27

â€Śand ensure fiscal sustainability General government debt, as a percentage of GDP

Source: OECD calculations based on Y. Guillemette and D. Turner (2017), "The fiscal projection framework in long-term scenarios", OECD Economics Department Working Papers, No. 1440, OECD Publishing, Paris. 28

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Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

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