In 2005, Israel's economic recovery continued and became even
more firmly based. GDP grew rapidly by 5.2 percent, led by
the business sector which expanded by 6.6 percent. The
integration of the Israeli economy into the global economy
continued.
Macroeconomic policies in 2005 achieved three numerical
objectives: The rate of inflation at 2.4 percent was within
the price-stability range, and both the budget deficit at 1.9
percent of GDP and the increase in public expenditure at
about 0.3 percent were below their ceilings. The public-
debt/GDP ratio declined significantly, although it remains
very high in international terms.
The main goal of economic policy for the next few years
should be to create the necessary conditions for sustainable
growth, which will raise the overall economic well-being of
Israelis, and make it possible to tackle social problems, in
particular that of poverty. To do this, economic policy will
need to maintain fiscal discipline, price stability and
financial stability, while promoting reforms that will
improve infrastructures and intensify competition in the
economy. Alongside all these, a continuous policy focused on
reducing poverty is required.
In 2005, Israel's economic recovery continued, and became
even more firmly based. GDP grew by 5.2 percent. Improvements
in the macroeconomic environment and in the state of the
economy were reflected in many ways. These included the
decline in unemployment from 9.8 percent at the end of 2004
to 8.8 percent at the end of 2005, accompanied by increases
in the rates of both employment and labor force
participation; the increase in the surplus in the current
account of the balance of payments; and positive developments
in the capital markets. The above points are taken from the
Annual Report of the Bank of Israel for 2005.
in The Report also states that Israel's economic growth was
bolstered by the continuation of strong global growth and the
sustained improvement in the security situation, as well as
the steady implementation of a supportive economic strategy.
The macroeconomic policy mix combined fiscal discipline,
reflected in tight control of expenditure, a considerable
reduction in the deficit, and tax cuts, together with an
accommodative monetary policy. These made it possible to take
advantage of the favorable underlying conditions, and were a
key factor in the positive reactions of the financial
markets.
The integration of the Israeli economy into the global
economy continued apace in 2005: Imports currently constitute
more than 40 percent of GDP, and exports more than 35
percent; Israelis' investments abroad, direct and portfolio,
reached $10.1 billion; nonresidents' investments in Israel
totaled $10.8 billion; and nonresidents' participation in the
NIS/forex market rose to 49 percent. Integration into the
global economy is vital for Israel's continued economic
growth.
Macroeconomic policy in 2005 achieved its three numerical
objectives: The rate of inflation, at 2.4 percent, was within
the price-stability range; and both the budget deficit at 1.9
percent of GDP and the increase in public expenditure at
about 0.3 percent were below their ceilings. Correspondingly
the public-debt/GDP ratio declined significantly, although it
remains very high in international terms.
In the capital markets, where important reforms have been
under way for some years, progress was made on two fronts: A
significant start was made on the implementation of the
recommendations of the Bachar Committee to reduce banks'
holdings in provident and mutual funds, aimed at increasing
competition in the capital markets and reducing conflicts of
interest; and the process of equating tax rates on income
earned on securities in Israel and abroad was completed, thus
ending the tax discrimination that had favored Israelis'
investment in securities in Israel over such investment
abroad.
The incidence of poverty in Israel has risen in the last few
years, whether measured in relative terms or in terms of
basic needs. This reflects both the long recession, and the
cuts in welfare benefits from 2002. The latter were intended
to raise the rate of participation in the labor market, which
is an important means of reducing poverty in the long run.
The main goal of economic policy for the next few years
should be to sustain and strengthen the continuing growth of
the economy. Sustained strong growth will make it possible to
raise the overall economic well-being of Israelis, and to
tackle social problems, in particular that of poverty. To
sustain growth, economic policy will need to maintain fiscal
discipline, while striving to keep government spending and
the budget deficit as a share of GDP on a downward path. In
addition, macroeconomic policy should maintain price
stability and financial stability, while promoting structural
reforms aimed at improving infrastructure and intensifying
competition.
Alongside all these, a continuous policy focused on reducing
poverty is required. It is important that resources be
allocated to education to ensure that, in the long term, the
weaker sections of the population receive a level of
education that will enable them to participate in the labor
market. Several steps are required to reduce poverty in the
medium term; These should focus on the sections of the
population with a particularly high incidence of poverty -
low-wage employees, the elderly, the ultra-orthodox and the
Arab sector. At the same time some welfare benefits will need
to be adjusted for those unable to participate in the labor
force.
Legislation should be completed of a new central bank law,
which will deal with the independence of the central bank,
clearly define its purposes, and determine new frameworks for
decision-making and transparency. The main objective of the
Bank will be defined as maintaining price stability in the
long run in accordance with the target set by the government,
while supporting other government targets such as growth and
employment, without undermining long-term price stability,
and while supporting the stability of the financial
system.
