Report: Public expenditure relative to GDP declining

Taub Center: In 16 other OECD countries, proportion of expenditure has risen.

By NADAV SHEMER
August 3, 2011 03:55
2 minute read.
Report: Public expenditure relative to GDP declining

knesset. (photo credit: Ariel Jerozolimski )

 
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In the past five years, public expenditure in Israel has declined as a percentage of the gross domestic product, while in most OECD countries it has grown, the Taub Center concluded in its 2010 State of the Nation Report.

In addition, the report found that positive indicators regarding the current economy hide potential long-term problems that will affect standards of living.

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The social policy study center’s annual report assesses Israel’s standing from three perspectives: macroeconomic, employment, and welfare, health and education.

In its assessment of Israel’s macroeconomic performance, it found that although public expenditures first began to drop in the 1980s following the peace treaty with Egypt and a program to tackle hyperinflation, its decline in comparison to the GDP has been relatively rapid in the past few years.

In 1990, public expenditure equaled 56 percent of GDP, placing Israel second from among 23 developed economies surveyed – behind only Sweden. But since then this expenditure has dropped to its current mark of 45%, while in 16 of the other 22 countries it rose.

“After Israel emerged from the recession of the beginning of the last decade,” the Taub report said, “public expenditure dropped to 49% of the GDP in 2005 and Israel dropped to seventh [from the 23 nations] in the rankings. Until 2010, when most of the world was still in a state of deep recession that caused an increase in public expenditure, Israeli public expenditure continued to drop relative to the GDP.”



More than anything else, the drop impacted the defense expenditure, which increased by 1.6% per year from 1990 to 2010, while the GDP increased by around 4.5% annually. However, during that same period spending on social programs as a proportion of overall spending actually grew, the report found.

Looking at the health of the economy, the report said current data showed it to be in a good state, although long-term problems in regard to the labor force and capital could harm the economy’s ability to expand and bring Israelis a higher standard of living comparable to relatively strong developed nations.

“These problems will widen inequality, harm social welfare, and lead to continuous long-term problems and friction between different segments of the population,” the report said. “Moreover, the practical limitations on fiscal policy, including the government’s structure, do not bode well for the possibility of using policy to treat these problems.”

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