If Israel's current government continues to act according to the economic policy pursued over the past few years for its entire term, the economy will be able to better withstand external shocks, a team of economists will tell decision makers at the upcoming Caesarea Forum.
After a solid four years of pro-growth policies, even in a situation on the order of those which rocked the economy in 2000 - a dramatic escalation of the Arab-Israeli conflict or the bursting of another hi-tech bubble - "damage to the Israeli economy ... would be significantly smaller and there would not be a risk of descending into a financial crisis," researchers said.
Heading the team, Prof. Rafi Melnick of the Interdisciplinary Center Herzliya commented that since the beginning of the State's existence, Israel has been exposed to geo-political and economic shocks.
"Every time there was a state of emergency, Israeli governments took emergency economic steps that took too heavy a toll on the economy," he said.
Alternatively, "maintaining restraint on the growth of public spending, continuing to implement reform in taxation, controlling the deficit until it is brought into balance and further reduction of the public debt would strengthen the Israeli economy and bring it into a condition in which chances of severe economic deterioration are exceedingly small," Melnick said, outlining key goals of the economic policy spearheaded by former finance minister Binyamin Netanyahu.
The team will present decision makers at the forum, to be held in Jerusalem from June 20-22, with four scenarios of economic policy alternatives that could be chosen, alongside projected impacts of each. Continuing the conservative policy led by Netanyahu (scenario I) would lead to very quick growth of the business sector, but "the more the government shifts emphasis to social aims ... the more the business sector's growth rate will be hurt," the team concluded. Forecasts included in the report range from an average 5.1% annual growth rate of the business product under the existing policy, down to 4.1% if budget spending and the deficit are increased.
On the other hand, allowing budget spending and the deficit to increase would help reduce unemployment, at least temporarily, as a result of job creation in the public sector. Unemployment could creep back up, however, since "implementing such a policy for an extended period of time would likely cause severe problems in the economy, including excessive rises in wages and reduced profitability, inflationary pressures, inflationary break-outs, worsening balance of payments, and even damage to growth in overall productivity," the researchers warned.
In turn, this would lead to monetary restraint - expressed in higher interest rates - further hurting the business sector and necessitating fiscal tightening, which would bring unemployment back up.
Growth of the GDP would average 4.1% over the next four years under the existing economic policy, but only 3.5% if taxes are not cut or if budgetary spending and the deficit are allowed to grow. Cutting taxes but caving in to coalition pressures to increase spending and expand the deficit would result in 3.8% average growth of the economy over the next four years, the team estimated.