OECD Economic Surveys: Israel 2020
The Israeli economy was performing well before the COVID-19 shock but the pandemic is threatening to reverse some of Israel’s recent economic achievements, raise poverty and exacerbate wide productivity disparities between its vibrant high-tech sector and lagging sheltered sectors. Lockdown measures and high uncertainty have led to a sharp contraction in output and reduced employment. In this environment, macroeconomic policy needs to remain supportive and flexible to adapt to the evolving health situation. Enhancing training and job search support is crucial to help laid-off workers transition to new jobs quickly and avoid long-lasting negative economic effects. Structural reforms and additional public investment to improve educational outcomes, boost infrastructure and foster product market competition are key to strengthening the recovery. Reducing wide differences in resources between municipalities will promote equal opportunities for everyone. Tax reforms to further strengthen in-work benefits, cut inefficient tax expenditures, reduce distortions created by the business and property tax system and better align taxes with environmental externalities will make the recovery more inclusive and sustainable, while generating additional revenues.
SPECIAL FEATURES: REDUCING MUNICIPAL DISPARITIES; TAXATION
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Enhancing the efficiency and equity of the tax system in Israel
Israel’s tax mix is reasonably growth- and employment-friendly. Nonetheless, tax reform is needed to foster an inclusive recovery from the COVID-19 crisis and help tackle Israel’s main economic and societal challenges of high poverty, including among those in work, and slow aggregate productivity growth. The earned income tax credit has been an effective tool to reduce poverty and increase employment among the low-skilled and could be further expanded. The business tax system provides large benefits that aim to incentivise companies to become more productive, but the existing design may create distortions. This preferential tax treatment should be reviewed with a view to better targeting the scheme to ensure net benefits to society. There is also scope to simplify the tax system by removing inefficient tax expenditures and better leverage Israel’s impressive technological capacity to further lower compliance costs and reduce tax evasion. Finally, excise taxes should be adjusted, including by taxing carbon more heavily, to improve environmental and health outcomes.