Israel

Published October 18th, 2000 - 02:00 GMT

 

Indicators:  

1998 

1999 

2000e 

GDP real growth rate (%) 

2.0 

2.0 

4.0 

Unemployment (%) 

8.6 

8.9 

Inflation (%) 

8.6 

1.3 

2.2 

Total Exports (US$bn) 

22.1 

23.6 

24.0 

Total Imports (US$bn) 

26.1 

30.6 

31.5 

Trade balance (US$bn) 

-4 

-7.0 

-7.5 

e - Al-Bawaba forecasts 

 

 

 

 

 

 

Political Outlook 

 

Prime Minister Ehud Barak fulfilled a major campaign promise by pulling Israeli troops from south Lebanon in late May, prior to the July deadline. The Israeli public had grown increasingly disenchanted by the rising number of casualties in south Lebanon. While the long-term border situation still remains uncertain, relative calm has persisted in the immediate period following the withdrawal. 

 

In the third week of June, a coalition crisis was averted with the resignation of Meretz cabinet ministers Yossi Sarid (education), Ran Cohen (industry and trade) and Haim Oron (agriculture). Prime Minister Barak did not try to persuade Meretz ministers to reconsider their decision, and appreciated the concession they had made in order to enable the peace process to continue. Meretz will continue to support the government as though it were still part of the coalition.  

 

Meretz’ departure paved the way for the religious Shas party to return to the coalition. A major rift between the two parties developed in early 2000 when Yossi Sarid refused to allow Shas to control state funding for its network of religious schools. Relations between the two parties deteriorated further when Shas spiritual leader Ovadia Yosef likened Sarid to the Devil, an outburst that Meretz portrayed as a death threat.  

 

Economic Outlook 

 

In mid-May, the Israel government approved in principle the Ben-Bassat recommendations on tax reform. The primary goal of the reform is to eliminate the inherent discrimination on work as opposed to capital, which causes distortions in the allocation of capital and funds. Israel's present tax rates on work rise rapidly, reaching a level of 55 percent on gross monthly income above NIS 10,000 (about $2,500). In contrast, revenue earned through capital is tax-exempt. Furthermore, the state grants generous subsidies to capital investments. The lack of taxes on capital has served to widen social gaps between rich and poor, since only the wealthy earn significant income from capital. 

 

The central premise of the Ben-Bassat committee is that high marginal tax rates harm economic efficiency by creating a disincentive for people to work hard or take risks to earn more. According to this reasoning, the committee's primary objective was to cut Israel's high marginal tax rates, thus increasing the disposable income of salaried employees. To compensate for the state's loss of tax revenue, the commission recommended eliminating tax exemptions totaling NIS 6 billion, notably in the capital market. Capital gains will now be taxed at a rate of 25 percent.  

 

One immediate reaction to the official publication of the report was a frantic rush by the public to open long-term savings plans and evade the coming 25-percent capital gains tax. Bank officials indicated that in the day prior to the release of the committee's recommendations, approximately NIS 2.5 billion was moved from short-term savings accounts and other short-term investment plans to long-term savings accounts. 

 

The reform's long-term impact on foreign investment may be even more acute. The committee recommends a fixed tax rate on distributed corporate profits of 36.25 percent, compared to the present tax rate of between 23.5-32 percent. It also suggests annulling all benefits to foreign investors and matching their conditions with those of local investors. Many experts suggest the recommendations will drive foreign investments from Israel, and are liable to cause an almost immediate halt in the establishment of plants in Priority Region "A". According to Yoav Nissan Cohen, CEO of Tower Semiconductor, "the Ben-Bassat committee recommendations significantly affect the attractiveness of foreign and local investments in Israel, which in any case is not great. We may have to reconsider the decision to set up the new plant in Israel."  

 

Several months following publication of the Ben-Bassat recommendations, a number of political developments, such as a coalition crisis and threats by the Histadrut (Israel’s powerful labor union) have made it increasingly unlikely that the tax reform will actually be implemented.  

 

Prior to the release of the Ben-Bassat recommendations, Israel’s economy exhibited signs of growth, due largely to a buoyant international economy and the tourist influx resulting from the Pope’s visit in March. The recovery in many sectors of the economy that began in the second half of 1999 continued in the first quarter of the year, with business sector product increasing by approximately 6.7 percent over the fourth quarter of 1999. According to recent projections, expansion is expected to persist throughout the year, and per capita income should rise for the first time in several years. 

 

Conclusion 

 

More than a year after being elected Prime Minister, Ehud Barak has failed to deliver on his economic promises. A central premise of his campaign platform was the creation of 200,000 jobs over a three-year period, but Israel’s unemployment rate still hovers around 9 percent. Recent forecasts project 3.5 percent economic expansion this year, a positive indicator for a country striving to escape a prolonged recession. Still, failure to reach a comprehensive political accord with the Palestinians may raise levels of political uncertainty and deter foreigners from injecting capital into the Israeli market. 

© 2000 Mena Report (www.menareport.com)

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