Bank of Israel report sees 'reasonable' economy, questions housing program

While pleased with the level of economic growth in the private sector, Rivlin was never-the-less troubled by the huge gap in wages between high and low income earners.

April 3, 2016 18:55
3 minute read.
Karnit Flug and Reuven Rivlin

BOI Governor Karnit Flug presents annual report to President Reuven Rivlin. (photo credit: HAIM ZACH/GPO)


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The Bank of Israel questioned the efficacy of Finance Minister Moshe Kahlon’s signature “Buyer’s Price” housing program in its annual report, which was submitted to Prime Minister Benjamin Netanyahu and President Reuven Rivlin on Sunday.

The price of housing continued to rise in 2015, by eight percent, the report noted, adding that the record number of 48,000 housing starts were insufficient to curb the price.

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“While the government did attempt to lower housing prices, it seems that the increase in purchase tax imposed on investors and the ‘New Format Buyer’s Price’ program have not generated results for lower prices,” the report noted.

Though it helped the couples who were lucky enough to win a lottery for discount-priced homes, the report said, the scale was not significant enough to impact the overall market. If the program grew significantly, it would take a big bite out of state revenues, according to the report.

“The program will not significantly increase the supply of homes, since it will come mainly in lieu of marketing land to contractors on the open market. In other words, the government will subsidize home prices without significantly increasing the supply,” the report said.

The report also bore positive assessments on the economy.

“I would like to say that the economic situation is, overall, reasonable relative to the complex global environment,” BoI Gov. Karnit Flug said.


“All in all, the labor market is in a good situation; unemployment is low, employment has increased, wages have risen, and the good economic situation allows us to focus policy on matters that we really need to focus on in the long term. I think that this will also free us to focus on the next budget and our major challenges,” she added.

Low unemployment (5.3 percent in February) remained a bright spot, even as the labor market participation rate continued to rise, another positive sign for the economy, though one that was not increasing quickly enough.

The negative inflation, it said, was largely due to external factors or one-time changes, and should not be read as a sign of entrenched deflation, which can hurt growth. Expectations in the market, however, are that inflation will not return to the target range for several years.

“I am pleased to hear that we are at an all-time low for unemployment, and are at high, full employment, and this is pushing wages upward,” Netanyahu said upon receiving the document, pointing to opening trade policies with the East as an engine for further development.

In presenting the report to Rivlin, Flug said that Israel still has a lot of catching up to do with other developed countries.

Rivlin praised the scope and depth of the report, which he said should serve as a central point of reference for policy-makers. He said the that the report was “yet more proof of the high standard of professionalism of Israeli public servants in general and the Bank of Israel in particular, and illustrates the importance of a strong professional body to Israel’s economic stability.”

Referring to the statistics on poverty, Rivlin said that an impoverished citizen is stooped and hungry and unlikely to wield influence. Poverty harms not only the poor, he said, but is a blight on democracy. He voiced concerned about the growing share of wealth in the hands of an elite few.

While pleased with the level of economic growth in the private sector, Rivlin was nevertheless troubled by the huge gap in wages between high and low income earners and that the Arab and haredi (ultra-Orthodox) sectors have not been adequately integrated into the workforce.

Recalling the positive impact on the economy by the large Russian immigration of the 1990s, Rivlin said that a similar boost could be given to the economy if more Arabs and haredim were absorbed into the labor force.

Referencing BDS, Rivlin underlined the importance of maintaining good economic relations with the US and Europe, which are among Israel’s most significant trading partners.

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