Economic Developments in Israel: An Overview
Author: Benjamin Bental, Gilad Brand Policy Research

In 2018, employment is at an all-time high, unemployment is at a historic low, GDP growth is high, and wages have risen. However, growth potential is declining due to demographic changes and trends in labor productivity, which is not growing at all.

  • Assuming that the government will increase its expenditure in accordance with the relevant legal rules and limitations, it seems that as of 2020 the government will breach the deficit limit as it is set by law, and that the problem is likely to become even more severe in the long run. The budgetary problem is expected to increase further if the government follows throu­­gh with its plan to increase the defense budget to about 6% of GDP, and to peg it to the GDP growth-rate. Such tendencies will impair the government’s ability to improve services and infrastructure and may weaken the standing of the Israeli economy in the global capital market.
  • Since 2012, increased employment has been the main source of Israel’s per capita GDP growth. Despite the fact that most of the workers joining the labor force were low-skilled workers, there was an improvement in the quality of employment due to an increase in experience and education levels. However, the working-age population is shrinking, as is the potential for future economic growth from increased employment rates. Therefore, it will be difficult for the Israeli economy to continue growing without an improvement in other growth-enhancing factors.
  • Expanded employment and the rise in wages were reflected in an impressive increase in households’ income and consumption. This was particularly apparent among households in the middle and lowest income quintiles (an increase of 16% and 13%, respectively, between 2012 and 2016), while among the highest income quintile there was a more moderate increase (9%).
  • In recent years, prices in Israel have increased at a significantly lower rate than in the OECD. As a result, consumer prices relative to the OECD average have declined by 5.2% since 2014. This is surprising given the good state of Israel’s economy and the sharp rise in wages in recent years, and resulted from measures taken to increase domestic competition after the 2011 social protests.
  • Nevertheless, price levels in Israel remain significantly higher than expected given income levels, which negatively affects the standard of living. Against the backdrop of mounting public pressure and reports of expected price hikes, removing barriers and encouraging competition in the local market could help the country cope with this challenge.