In the Wake of COVID-19 – Important Questions for Israel in 2021 and Beyond

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Taub Center researchers have mapped out challenges and opportunities expected in the coming years in the fields of macroeconomics, the labor market, welfare, education, health, and demography. The following are the key issues and important questions facing Israel in the next few years.

  • Economic growth: Taking into account Israel’s 1.8% population growth, GDP per capita decreased in 2020 by 4.3% and returned to its 2016 level. If the rapid immunization process continues, a growth of 6.3% in GDP is expected in 2021 and 5.8% in 2022—growth that nearly closes the gap and brings GDP per capita close to its expected growth rate without the coronavirus. A slow immunization process will reduce the expected GDP growth rate (to 3.5% and 6%, respectively).
  • The deficit: In 2020, government spending increased by 22.5% and the cumulative annual expenditure reached about 35% of GDP, while revenue fell to about 23%—a gap that created a deficit of almost 12%. It is important to bring the deficit back to its mid-decade levels; the question is how this will be done. It seems that there will be no choice but to raise taxes, but in order to avoid increasing inequality between Israel’s population groups, it would be ideal to avoid raising indirect taxes, which are regressive by nature.
  • The national debt: In 2020, the national debt increased to 72% of GDP, and it is expected to grow further. This ratio of debt to GDP sets Israel back by more than a decade. In order to maintain Israel’s credit rating, it is important to take steps to reduce the deficit and encourage growth, which will lead to a gradual reduction in the debt-to-GDP ratio. The big question here is how quickly this will happen.
  • The financial system: The financial system has helped households and businesses deal with the crisis through deferred loan payments. These measures are intended to be temporary and, indeed, by the end of November 2020, the deferral period had ended for about 70% of the debt that had been deferred among large and medium-sized businesses, about 74% among small businesses, and about 64% among micro businesses. Among private customers, the loan deferral period ended for about 52% of non-housing loans and some 56% of housing loans. As of the end of November, total deferred liabilities stood at about NIS 161 billion, which amounts to 16% of the country’s total credit. This high rate of debt deferment calls for close monitoring of the risk of insolvency and an assessment of threats to the stability of the financial system.
  • Unemployment: The unemployment rate—per the expanded definition during the crisis—stood at 16% at the end of 2020. Although unemployment is expected to fall significantly, it will still remain high relative to its levels over the last decade, and the optimistic scenario for 2022 puts unemployment at 5.4%. Some unemployed workers will return to their previous jobs; others will find new jobs. Some people will continue searching for work while others will leave the labor force entirely. This is likely to be the case mostly among vulnerable populations. A critical question remains as to the ultimate size of this last group, a population with which the welfare system will be forced to deal.
  • The return to work: Unemployment is concentrated among low-wage earners, young people, those with low education levels, and in industries such as food service and tourism. It seems that these are also the groups that will find it difficult to return to the labor market, likely due to a mismatch between workers’ skills and the needs of employers. In addition, prolonged absence from the labor market affects workers’ skills and reduces their wages upon their return to work. Therefore, the inequality that has diminished in recent years may increase again if the more vulnerable populations fail to be absorbed back into the labor market.
  • Training programs: Employment programs are designed to help people acquire tools to help them integrate into the labor market. To this end, the Ministry of Labor, Social Affairs, and Social Services allocated about NIS 375 million in the past year to vocational training programs, yet only a small portion of this sum has been used, and only recently has the ministry expanded its activities in this area. This can have a crucial effect on the levels of poverty and inequality, as well as on increasing the ability of vulnerable populations to improve their status. The question is to what extent they will be able to train workers for the modern labor market and whether these training programs will be effective, given the difficulty of adapting them to the needs of diverse populations.
  • The difficulty of returning to the labor market: To what extent will the social security system be able to balance between encouraging the unemployed to reintegrate into the labor market on the one hand, and, on the other hand, ensuring a reasonable standard of living for those who have not yet been able to reintegrate? It should be noted that the work grant is still low, uptake of the grant stands at only 70%, and the very existence of a work grant entails a risk of more clandestine work.
  • The effects of remote work: The trend of working from home continued in the periods in between lockdowns and will continue even after the pandemic, which may affect rental prices and the demand for office space. There may also be an effect on residential patterns—residents may shift from the central region of the country to the north and south and out of big cities to localities with lower prices and higher standards of living. If this transition takes place on a significant scale, it may affect apartment prices in the center of the country and the periphery. In the third quarter of 2020, real estate sales in the southern region were 31% higher than in the same period in 2018, while in the rest of the country sales were lower (except in Jerusalem, where there was a 2% increase). Apartment prices were similarly affected. Movement of this nature from the center to the periphery has additional expected impacts, such as an increase in the proportion of the country with high education levels living outside of the center and a positive impact on schools in these areas.
  • Deepening poverty and inequality: The welfare system has been successful in providing a safety net for many citizens and reduced the incidence of poverty by about half in 2020. As the crisis ends, however, there is a danger that the system will return to the pre-crisis situation and even regress given expected demands for budget cuts. This will lead to a deepening of distress among those who live in poverty and need assistance. Many of those in distress will be unable to return to the labor market (due to age or disability, for example), and the end of the period of entitlement to expanded unemployment benefits will force many to rely on an income support benefit, which is quite low. All of this, along with reinstating the previous unemployment insurance policies, may create a large group of new poor, condemning them to economic and social distress.
  • Institutionalized distance learning: Online teaching will become an integral part of the education system and will greatly influence it. It is necessary to examine which subjects are suitable for distance learning and which are important to be taught in the physical space of a school; to train teachers to use new technologies and advanced teaching methods that help assimilate distance learning into part of their work; and to reduce infrastructure gaps between schools and students. The transition to distance learning also has an influence on higher education—there are many courses that can be taken remotely, and it is likely that institutions will incorporate this as part of the curriculum moving forward. This change may be beneficial to students from the periphery and vulnerable populations, and may even contribute to increasing economic mobility while reducing inequality, but it may also strengthen universities at the expense of colleges.
  • Smaller classes and differential budgeting: This crisis has unveiled the gaps that exist in the education system. The education system has provided some solutions, such as distributing computers to some of the population and reducing the number of students per class. The question is whether the small classes can be preserved in view of the concern that the special budget allocation that made smaller classes possible will not continue after the crisis. In order to preserve the strides that were made during the crisis, differential budgeting will need to be adopted throughout the education system—from pre-school through the end of high school—with a higher per-student budget for students from weaker socioeconomic backgrounds than for students from strong socioeconomic backgrounds. There is also room to consider cancelling or downsizing Bagrut (matriculation) exams and moving to a five-day school week.
  • Strengthening the autonomy of local authorities and schools: The success of local authorities, school principals, and teachers in operating schools under conditions of extreme uncertainty highlights the potential benefit from redefining the division of roles between central and local governments. Policymaking, supervision and oversight should remain in the hands of the Ministry of Education, with authority granted to principals and the heads of localities to manage and adapt the Ministry’s rules to local conditions. It will be necessary to develop a set of tools, guidelines, and perhaps different levels of authority for different localities, in order to ensure that educational and social equality between localities is not harmed.
  • The impact on early childhood: The instability and loss of school days can lead to a serious developmental delay in early childhood. Moreover, while children of families from strong socioeconomic backgrounds likely received enriching content in their homes during the crisis, children from weaker backgrounds likely did not. It can be concluded that the prolonged stay at home created a greater developmental lag among young children from weaker economic groups and deepened the existing gaps. Data from a special Taub Center survey conducted during the second lockdown finds that about 70% of parents reported an increase in screen time for their kids. The adverse developmental effects of increased screen time can include weight gain, sleep and attention problems, impaired language development and lower academic achievements. The extent of the damage and if and how it can be addressed is still in question. In both the short and long term, several steps can be taken to reduce the damage: providing support and assistance to parents, disseminating information on the proper use of screens, encouraging parents to spend time with their children in ways that contribute to their cognitive development, encouraging teachers to contact and guide parents, adding hours to early childhood education in the years to come, improving the quality of early childhood education frameworks, and preparing primary schools to offset the developmental lags of the coronavirus cohorts when they reach school
  • Changes in health services: Many resources have been added to the health system to deal with COVID-19, but it is unclear the extent to which this resource allocation will continue after the pandemic. An opinion that gained traction during the pandemic was that Israel should invest more in community-based healthcare and not necessarily in hospital care. Indeed, the community care that was led by Israel’s health funds, which were entrusted with testing and vaccinations, proved to be a great success. The health funds also increasingly provided remote healthcare services through telephone consultations between patients and medical staff. If the use of telemedicine continues after the crisis, it will have an important impact on waiting times and quality of service. Expansion of remote medical services and community and home-based care will help overcome some of the current shortcomings of the system.
  • Other health effects of COVID-19: COVID-19 has affected public health in a variety of additional areas—one of these notable areas is mental health. The results of a Ministry of Health survey indicate a significant increase in the number of requests for mental health treatment (a 20% increase during the second lockdown over the same period in 2019). Such mental health problems will continue after the pandemic, and the need for public mental health services will increase. Waiting times, which were already long before the onset of the pandemic, will be even longer. To shorten them, resources would need to be invested in manpower, salary increases, incentives for studying psychiatry, and raising awareness about immediate, short-term mental health solutions already in place (such as hotlines). In addition to the mental health crisis, the public’s reluctance to seek medical treatment during periods of high infection rates impacted the number of diagnostic tests for serious diseases. This will have long-term effects, including more severe morbidity due to late diagnoses and long waiting lists that resulted from fewer routine diagnostic examinations being carried out during certain periods.
  • Life expectancy: The direct impact of COVID-19 in Israel on demography is small, and the overall rate of population growth is unlikely to be affected. The pandemic caused just a 2.4 month decline in life expectancy in 2020. Despite the excess mortality already witnessed in 2021, it can be expected that by the end of this year there will be an increase in life expectancy, and perhaps even an increase beyond what would normally be expected.
  • Increased immigration to Israel: Immigration to Israel has been increasing since 2008, and the number of people leaving Israel has been declining since 2002. Since 2002, Israel’s population has increased by 36%. Given the increase in the number of those filing for immigration, it is likely that the number of immigrants will increase in the coming years, as will the number of returnees to Israel, though it is not clear by how much. This increase is due to three factors: the countries where many Jews live were hard-hit by the coronavirus, combined with Israel’s successful vaccination campaign; the rise of the populist right and progressive left movements in foreign countries, which have increased anti-Semitism; and the economic losses associated with the epidemic has reduced the appeal for staying in place.
  • The effect of COVID-19 on fertility: Some are expecting a baby boom in Israel, whether due to the absence of work and travel, staying at home, or the desire of young people to “celebrate life.” Others think the crisis will actually lead to a decline in birth rates due to economic insecurity, cultural changes, rising legitimacy of non-parenthood, and the ecological cost of having children. We may see many changes in birth distribution of different population groups: among Arab Israelis, Haredim and the religious, there is virtually no fertility outside of marriage, so the decrease in the number of marriages during the crisis may affect their fertility in the coming year and possibly the number of births throughout one’s life. The economic toll of the pandemic could also lead to a decrease in childbirth, but among Haredim, whose fertility is less tied to economic pressures, it is possible that no real change from this source will be observed. The overall effect of the virus on fertility is still unknown.

“It is difficult to know today what the consequences of COVID-19 crisis will be after it passes. However, data point to clear challenges that require attention soon, such as the deficit, the high level of unemployment that will continue even after many return to the labor market, and the long-term effects of the crisis on students, particularly those in vulnerable population groups, on early childhood, and on the health system—mental health in particular. In the past year, many resources have been added to various systems to help deal with the crisis, but it is doubtful whether the resource allocation will continue after the crisis. There are many more challenges than meet the eye, and the purpose of this document is to delve into the questions that should be paid attention to in the next year or two,” says Taub Center President Prof. Avi Weiss.

The Taub Center for Social Policy Studies in Israel is an independent, non-partisan socioeconomic research institute. The Center provides decision makers and the public with research and findings on some of the most critical issues facing Israel in the areas of education, health, welfare, labor markets and economic policy in order to impact the decision-making process in Israel and to advance the well-being of all Israelis.

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