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2009 OECD Economic Surveys: Israel 2009

image of OECD Economic Surveys: Israel 2009

This first OECD review of Israel's economy includes chapters covering recent economic developments and policy challenges, the macroeconomic policy framework, education reform, reducing poverty and raising employment rates, and policies affecting the business environment.

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Assessing the macroeconomic policy framework

Israel’s monetary policy framework is broadly sound. Inflation targeting was introduced in the early 1990s, and low single-digit inflation was established by the end of the decade. However, fast transmission from the exchange rate to inflation means the operational challenges differ somewhat from those in many OECD countries. Also, the Bank of Israel has been intervening heavily in the foreignexchange market, marking a departure from standard practice in inflation targeting. Past progress in fiscal consolidation has been affected by several economic shocks, including the recent downturn. The government’s strategy of lowering tax rates on corporate profits and on personal income is assessed. Also, various avenues for raising revenues on other fronts are suggested. Primary civilian spending is now relatively low in international comparison, the room for savings has narrowed, and many of the necessary future structural reforms probably require initial fiscal outlays. In budgeting, which is strongly controlled by the Ministry of Finance, there is room for various process improvements.

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