New OECD report on Israel praises Trajtenberg

Biannual report delving into Israel's economic challenges calls to open up the economy; warns 2012 budget should not be reopened and significant deviations from already-announced spending should be opposed.

December 12, 2011 13:25
2 minute read.
Fischer, Steinits receive copy of OECD report

Fischer Steinitz get OECD report 311. (photo credit: Yael Ben Simhon, Finance Ministry)

The Organization for Economic Cooperation and Development (OECD) handed its biannual, country-specific report on Israel to Finance Minister Yuval Steinitz and Bank of Israel Governor Stanley Fischer on Monday.

The report, which focuses on economic challenges specific to Israel, included assessments and recommendations on the Trajtenberg report - which received praise - new fiscal rules, the Sheshinski commission on natural resources, housing, and environmental issues.

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  The report noted that although Israel emerged from the 2008-2009 global economic crisis relatively unscathed, worsening global economic developments, high geopolitical tensions and the social protests that added a new dimension to the socio-economic agenda will have an influence on the economy.

the report lauded the Sheshninski commission's reform of taxing natural gas and oil and noted that it will almost double the share of the state's gas profits, bringing it close to the OECD country average of 61-65%.
Recommendation on taxation from the Trajtenberg committee were given positive reviews as well, and the reported noted that the Israeli market needs to be demonopolized. The report discouraged Israel from significantly raising taxes on high-income earners beyond the Trajtenberg committee's recommendations. Further increases, it argued, could encourage tax evasion while only slightly increasing revenues.

In the field of employment, Israel's unemployment rate reached a low-point of 5.5% in the second quarter of 2011, while participation in the labor market increased.

Contrary to conventional wisdom, the report said, raising the Value Added Tax (VAT) would be the least potentially damaging method of raising government income. Israel's 16% VAT rate is significantly lower than in many OECD countries, and the government should go beyond the Trajtenberg recommendations - which prevented VAT from falling to 15.5% - and actually raise the tax.

The report's also stated that the government's new fiscal rule will increase the level of expenditure relative to its predecessors. However, the 2012 budget should not be reopened and significant deviations from already-announced spending should be opposed.

Steinitz welcomed the report, saying its findings reinforced the government's economic principals. "The biannual OECD report supports the policy principals the government has followed in recent years. We will continue to operate responsibly to maintain the budgetary frameworks."

Fischer added that Israel will "examine the important issues it raises and discuss its recommendations and their possible implementation."

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