(AA) – Israeli Prime Minister Benjamin Netanyahu pledged in his campaign in the recent election to improve the Israeli economy.
But as he sets up a new coalition government on Friday, he must confront a slew of economic challenges if he is to make good on his vow.
The Israeli economy is forecast to grow about 3 percent in 2015, but the costs of conflict and occupation are holding it back.
Israel’s economy, which had been growing at an annual rate of about 3 percent lost 0.4 percent in the third quarter of 2014 due to the impact of the war in Gaza and the concomitant drop in tourism, which makes up 2 per cent of economic output.
The war went on for 50 of the quarter’s 92 days and was the longest of three that Israel has fought in Gaza since 2009, according to Bank of Israel statistics.
Costs of the occupation are difficult to pin down, but, to give an idea, economist Shir Hever estimates that the separation created by the wall has led to economic losses of $200 million per annum for Jerusalem alone.
“The bottom line is that the costs of the occupation are devastatingly high on all sides,” Hever said in his book Political Economy of Israel’s Occupation.
The military operation cost Israel 0.6 per cent of its gross domestic product, according to credit rating agency Fitch.
Additional military spending next year will widen its budgeted deficit to 3.4 percent of GDP.
The government of Benjamin Netanyahu originally targeted a deficit of 2.8 per cent for 2015 but it will hit 3.3 per cent, Fitch said in a note published in March.
While a tighter budget is planned for 2016, Fitch does not think the government can meet targets without raising taxes.
Progress in public debt reduction has been hindered by military and occupation costs, Fitch said.
But the Israeli economy has considerable strength, according to the most recent report from the International Monetary Fund.
Israeli growth is supported by its robust high-tech economy, the IMF said, and security and military expenses are compensated in part by the development of the Tamar gas field, which was discovered in 2009.
The recovery in Europe should also help boost growth in Israel, the IMF said, but warned that volatile global economic conditions could hurt the country’s economy.
Further involvement in regional conflicts could put heavy pressure on the Israeli budget, the IMF said.
While growth may stabilize, domestic conditions are challenging as well.
Housing prices have doubled in the past eight years, according to Bank of Israel statistics, while average salaries rose a mere 23 percent.
In the run-up to the vote, Netanyahu, who is set to become the country’s longest-serving premier if he completes the term, pledged to abandon value-added tax on basic food items and cut prices for household electricity and water by about 10 percent.
Key indicators are falling far behind OECD levels because of a lack of investment in infrastructure and education, according to a State of the Nation report published by social scientist Dan Ben-David in January 2014.
Average nationwide scores on international exams are among the lowest in the developed world, according to the report.
Educational achievement in basic subjects among Israeli children has dropped to 24 out of 26 developed nations reviewed in the PISA exams.
Gross domestic investment (on equipment, machinery, buildings, etc.) fell from 28 percent of GDP in the early 1970s to under 20 percent in the early 2000s, with only a slight rise in recent years, the report said.
Concentration of wealth is also a challenge.
Some 20 families control about half of the total value of Israel’s stock market, prompting the Bank of Israel to warn that “the high level of economic concentration in Israel … aggravates systemic risk in the domestic financial system.”
“Israel is now right up there with America as one of the most unequal societies in the advanced world,” Nobel laureate economist Paul Krugman wrote in a recent column for the New York Times.
While employment remains strong, with an unemployment rate at 5.3 percent, the decline in the quality of education may mean that Israel will see an increasing skills gap.
Moreover, the government does not have much budget leeway to address domestic challenges.