BoI 2011 report: Economy is in good shape

National Student Union says report highlights policy errors which will lead to more social protests this year.

Bank of Israel Governor Stanley Fischer 370 (photo credit: Sasson Tiram)
Bank of Israel Governor Stanley Fischer 370
(photo credit: Sasson Tiram)
Bank of Israel Governor Stanley Fischer submitted the central bank’s annual report to the government Wednesday, calling it proof that the economy performed well in the face of significant challenges in 2011.
“The Israeli economy is in good – if not excellent – shape,” Fischer said at the official release of the eight-chapter, 321-page report in Jerusalem. He pointed to relatively high economic growth, adding that middle-class incomes have increased and poverty levels have decreased in the past few years as jobs have become easier to attain.
Economic growth is forecast to reach 3.1 percent in 2012, the bank said earlier this week. Fischer pointed out that growth reached 4.7% last year and the unemployment rate dropped to 5.6% – the lowest level in three decades.
According to the report, inequality remains higher in Israel than in most Western nations, although the unevenness of wealth distribution has stabilized and even decreased somewhat since 2006. It pointed to a recent OECD report that found that disposable income gaps between the highest and lowest deciles have expanded since the mid-1980s. However, it said that the pre-tax income of Israel’s lowest deciles has outpaced that of the wealthiest half of the population in the past decade.
Labor demand continued to grow in the first half of 2011, leading to notable increases in nominal wages and in the number of paid jobs in the business sector, the report said. Demand slowed down slightly in the second half, although the employment rate continued to rise. The haredi (ultra- Orthodox) male workforce participation grew from 39% in 2008 to 46% in 2011, but the employment rates of haredi men and of Arab women remain about 15% short of government targets for 2020, it said.
The report called 2011 “a turning point” for the housing market, explaining that the rate of increase in home prices slowed considerably to about 4.5% – as compared to the record rate of increase of 20% at the beginning of 2010. According to the report, the high level of prices – which reduced the number of potential house-buyers – and acceleration in the pace of housing starts in part caused this slowdown.
The bank warned the government that it must make policy adjustments in order to reduce gaps between the expected budget deficit and the deficits required by laws for the coming years. It recommended “more rationalized management of the defense budget,” to avoid a repeat situation in which eventual defense expenditure far outweighs its budget allocation.
The report also addressed last year’s social protests, attributing their outbreak mainly to the high price of housing, a global rise in price of commodities and the process of fiscal consolidation, which began under then-finance minister Binyamin Netanyahu in 2003.
The fiscal consolidation involved a significant reduction in government expenditure, the deficit and the debt-to- GDP ratio, and contributed significantly to the creation of conditions that supported the exit of the economy from the 2008 global financial crisis and put it on a path of rapid growth and low unemployment, the report said.
But it added that some of the steps taken as part of this policy increased inequality, such as the reduction in National Insurance social welfare payments that primarily benefit weak sectors of the population, a slowing of growth in public services expenditure and the reduction in the direct tax burden on the top two declines of income distribution.
Prime Minister Netanyahu said he was pleased with the report’s acknowledgement of declining inequality. After Fischer presented Netanyahu the report, the prime minister said he was encouraged by the increase in the employment rate of haredi males, and that he agreed with its assumption that implementing free education for ages 3-4 will improve the situation of working families.
However, Labor leader Shelly Yacimovich called the report an “indictment” of Netanyahu’s taxation reforms, saying it backed her claim that the rich had become richer and that the state had abandoned the poor and the middle class.
“The state has retreated from its role as a supplier of education and health services, and those who have been hardest hit are the workers,” she said. “Only a social-democratic national path will fix this heavy damage.”
National Student Union chairman Itzik Shmuli also interpreted the report as supporting the claim that the government’s economic policy has widened social gaps and raised housing prices to unbearable levels. Given the government’s weak response to the protests, he added, “The governor’s report becomes not just an analysis of past policies, but also a prediction for the future – in which there will be another outbreak of social protests in the coming months.” •