Governor of the Bank of Israel Prof. Amir Yaron opened his remarks with a presentation of the state of the economy from the aspects of GDP, the labor market, and the situation of businesses. The Governor continued and presented the Research Department’s forecast, which will be published in full on July 5, according to which most of the output gap caused by the COVID-19 crisis is expected to close during 2022.


The decline in Israel’s GDP due to the crisis is smaller than in other countries, but not all sectors of the economy have returned to full activity. In addition, the labor market presents a complex picture, according to which certain population segments were negatively impacted more than others were, and there has been a slight increase in the unemployment rate, but with that, there has also been an increase in the employment rate. From the perspective of businesses, micro and small firms experienced a relatively strong negative impact.


From the perspective of the fiscal situation, the structural deficit in Israel in 2020 was relatively high compared to OECD countries, further to its high level even before the coronavirus crisis began. In the background of the discussion on the government budget, it was noted that both the tax burden and civilian expenditure in Israel are not high compared to the OECD average.


In addition, the Governor presented the main points of the Bank of Israel plan to accelerate the economy, which was published several days ago. The plan is made up of 4 strategic activity channels that are recommended to the government, and it also includes a fiscal framework to finance them. The first channel focuses on developing human capital. This is a very important issue, as the Israeli economy is characterized by low labor productivity, which derives from weakness in human and physical capital. The way to increase the level of human capital passes through among other things the reduction of quality gaps in education, through expanding the use of digital teaching means and creating “hybrid learning”.


The second channel deals with investments in physical capital and various infrastructures: energy, communication, transportation, and more. These issues are essential to closing Israel’s labor productivity gap with other advanced economies. Among other things, the plan includes a series of policy recommendations regarding housing in Israel, and the Governor listed some of them.


The third channel refers to the financial world. Among the main recommendations, the Governor listed the promotion of the Securitization Law. The law will contribute to increasing the supply of credit in the economy, and to a more efficient distribution of the risks in it, and this ultimately lead to lower prices for consumers.


The fourth channel includes recommendations for scrubbing data and using advanced technology in government services and activity. The Governor noted that the coronavirus crisis clarified and heightened the need for high-quality and reliable government databases that will be at the basis of making economic decisions. Among the other recommendations under this channel, the Bank recommends promoting regulatory easing and reducing bureaucracy, among other things in the areas of standardization and imports.


The Governor emphasized that the overall cost of the steps in the strategic document is estimated to be about 3 percent of GDP, spread out over several years. To the extent that the government decides to adopt the recommendations, this investment is expected to yield notable benefits in the future, which will lead to an improvement in the standard of living in the Israeli economy over the long term and will help to accelerate economic growth. The Bank of Israel’s estimate is that it is a return of 15–17 percent of GDP over the coming 20 years. The Governor noted that the financing for the steps noted in the Bank’s plan rests on maintaining fiscal responsibility, which requires a 1 percent reduction in the currently high structural deficit. It is important to note that sustainable government investment, which will not lead to an unrestrained debt to GDP ratio, requires some consolidation, which will include in the future, but not now, some combination of tax increases and higher debt. In order to finance some of the reforms, some tax increase will be necessary, and the government will have to decide on the precise composition of increasing debt and raising taxes. The speech also mentioned the reference by ratings agency S&P to the importance of the debt to GDP ratio in Israel’s economy converging to around 80 percent, and the possible impact on Israel’s credit rating.


The Governor concluded his remarks by saying that the government must steer economic policy in an informed manner that will lead, in the short term and in the long term, and between the need to promote essential investments in the economy and maintaining a responsible fiscal framework. The Governor presented 2 main recommendations: First, that it is better not to raise taxes or implement budgetary restraint in 2021 or 2022, other than specific adjustments, as needed, but also to avoid decisions that will increase the structural deficit. The second is that it is required to act already today to plan the various investments in the economy in order to grow over the long term, while financing the investments and carrying them out through a combination of taxes, reducing other expenses, and debt, starting from 2023.​