The challenges facing Israel’s economy
Author: Taub Center Staff

בנטל73As social distancing restrictions are eased in Israel, the country’s attention has started to turn from the health implications of the first wave of the coronavirus crisis to its economic implications. We asked the Taub Center’s Economics Policy Program Chair Prof. Benjamin Bental a few questions about the country’s economic exit strategy.

 

 

 

1. What challenges does Israel face in the realm of employment, and what can be done to address them?

Israel’s central approach for dealing with people whose work was affected by the economic closure – putting many workers on unpaid leave – is a very rigid approach as it does not allow workers to work part time. One consequence of this rigid structure is what seems to be a not uncommon phenomenon, whereby employers illegally abuse unemployment benefits as a substitute for salaries – putting workers on unpaid leave but expecting them to continue working, which leaves the government to de facto pay for this labor.

Looking forward, the Ministry of Finance has the challenge of building incentives for Israelis to return to the labor market, but it is important for the intervention in the labor market to take into account the interest of workers and not just employers. Currently, because of the data Israel already collects, it is easier for the government to provide incentives to employers based on the number of people employed rather than the number of work hours. However, this incentive structure would encourage employers to hire more people in part-time positions, to the harm of many workers. While it would indeed require some effort to collect the necessary data on working hours in Israel, this seems essential to the unique challenges of our time, and worth the effort. Under Germany’s coronavirus policies, for example, the government covers part of the remaining salary of workers employed in part-time positions which enables employers to keep workers on their payroll even during the crisis. An “all or nothing” approach creates obstacles harming Israelis’ ability to return to the labor market.

2. What can be done to bolster Israel’s business sector?

In addition to providing support for Israeli households, the government will need to provide support to the business sector, for small, medium, and large businesses alike. In other countries, support for the business sector consists of two main approaches. The first is direct grants primarily to small businesses to compensate for money lost and aid them to meet their basic ongoing payments. Israel does have a program along these lines but, from its outset, the program has not been clear to anyone. The second approach is providing support through loan programs implemented by banks. In this area, Israel’s policies are not as generous as those in other countries. In other countries government relief involves collateral-free loans, as well as policies that have the banks themselves take on some of the costs, such as reducing interest rates and lowering transaction costs.

Furthermore, given that this is a systemic crisis, other countries have frozen commitments for small businesses for a number of months, such as rent payments, providing them with some more time to accrue the necessary funds. This policy doesn’t exist here in Israel, and would be a welcome step that could smooth inherent market failures arising from the crisis.

3. What kind of effect is the coronavirus crisis expected to have on Israel’s deficit, and what should we do about it?

In the wake of the coronavirus crisis, Israel’s deficit is expected to grow to about 11% in 2020 which will, of course, increase Israel’s debt level as well. The rise in the deficit is inevitable, but it is also important that fear of deepening the deficit does not prevent investment in programs that will both encourage employment and have high future yield. This includes infrastructure projects in public transportation and the health system, and the digitalization of public services. These projects need to be done in any case and will bear fruits that can be enjoyed even in the not-so-distant future.

In general, smart public investment programs stimulate economic growth. Faster growth automatically reduces the deficit to GDP and debt to GDP ratios which are both important to keep Israel in good standing in the international capital markets.

4. What about Israel’s monetary policy?

It’s very important to keep an eye on our monetary policy as Israel exits the coronavirus crisis. The Bank of Israel is aware of this and is already taking steps to address potential concerns in the capital market. Some of the steps that can (and already are) being taken are lowering interest rates and buying government bonds. However, a measure that has been undertaken by major central banks in response to the coronavirus crisis, but not by Israel, is also buying corporate bonds in order to provide cheap liquidity.

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