2010-11 were good years for the Israeli economy, with an annual growth rate of 4.7%, but the slowdown hit in early 2012, and growth will be 2.5% this year. This is why the unemployment rate is expected to reach 7.5%, exports have stagnated, the balance of payments deficit will exceed $4 billion, and the budget deficit is expected to reach 3-4% of GDP. I believe that 2013 will be another difficult year, with the same low growth rate and an unemployment rate that is liable to reach 8%.

That is not what Ministry of Finance and Bank of Israel economists thought two years ago. Back then, they predicted 4% GDP growth, and the deficit falling to 1.5% of GDP in 2013. Reality bites. They were wrong and Europe is to blame.
I say that while Europe is partly to blame, most of the damage we did to ourselves, through the strong shekel, which cut manufacturing profitability and depressed market activity. This is a long process, which began in late 2008. We warned about it, but only now is the tip of the iceberg appearing.

Meanwhile, the social protest, which erupted a year ago, is back after easing a bit. Implementation of the Trajtenberg Report will cost a lot of money, which cannot of course be found during a slowdown. There are not even the budget sources to pay for the little that has been implemented so far. If nothing is done, the automatic pilot will be activated, and the projected 2013 budget deficit will reach 4% of GDP.

Government decisions

Under the circumstances, the cabinet approved the decision of Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz to double the 2013 deficit target to 3% from 1.5%. Governor of the Bank of Israel Prof. Stanley Fischer objected, but he accepts a 2.5% target, in order to keep the downward direction of the deficit target.
In my opinion, freezing the deficit target for the second consecutive year of a slowdown is the right economic decision, and was both important and brave, especially in view of the 7.1% unemployment rate – a very high level for an economy in which a substantial part of its working age population does not participate in the workforce.

It seems that the criticism of Netanyahu is due to a too slow realization by many Israeli and foreign economists that the Israeli economy is headed down the dangerous path of a prolonged slowdown. This is not just due to the crisis in Europe, but also because domestic production has not been very worthwhile for several years.

The inevitable result is the rise in the unemployment rate, stagnant exports, and a large balance of payments deficit of $4 billion a year. That is why, for now, the government should implement an anti-cyclical policy: in other words, when the economy is in a slowdown and tax revenues are not as much as projected, the deficit should be allowed to grow, and taxes should not be raised (except for taxes on very high incomes, which are unlikely to affect activity)…Read More>>

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