This document summarizes a report by Dr. Michael Sarel on various economic and social issues in Israel. The summary includes: 1) The report analyzes price levels and standards of living in Israel compared to other countries, finding that prices in Israel are generally lower except for housing. 2) Unemployment and income inequality trends in Israel are discussed, including differences between demographic groups. 3) Challenges facing the Israeli economy are outlined, such as improving productivity, demographic changes, and reducing the budget deficit. Housing affordability and proposed policies like zero VAT are also analyzed.

1. Social Protest, Housing, Regulation, and more …
Dr. Michael Sarel, Head of Kohelet Economics Forum
December 2014

2. Compared with the US, the Euro area and the OECD, the prices in Israel in most consumption sections, are not very high (as of 2011)
129
120
119
109
103
103
99
97
94
60
80
100
120
140
160
Communication (22)
Transport (20)
Food and non-alcoholic
beverages (3)
Clothing and footwear
(16)
Household furnishings,
equipment and
maintenance (18)
Miscellaneous goods and
services (26)
Housing, water,
electricity, gas and other
fuels (17)
Health (19)
Education (24)
Israel
United States
Euro area (17 countries)
OECD - Total
Source: OECD, 2011
Standard of living

3. In the food section, Israel is expensive in all categories except for one
116
84
103
60
80
100
120
140
160
Non-alcoholic
beverages (12)
Milk, cheese and
eggs (8)
Oils and fats (9)
Alcoholic
beverages (14)
Other food (11)
Bread and
cereals (5)
Fish (7)
Meat (6)
Food and non-
alcoholic
beverages (3)
Food (4)
Alcoholic
beverages,
tobacco and
narcotics (13)
Fruits,
vegetables,
potatoes (10)
Israel
United States
Euro area (17 countries)
OECD - Total
Source: OECD, 2011
Standard of living

4. Price Level and Income per Capita Level
-2
-1.5
-1
-0.5
0
0.5
1
1.5
5
6
7
8
9
10
11
12

5. 10.3%
9.7%
8.7%
7.4%
8.9%
8.0%
7.0%
6.9%
6.2%
6.6%
6.7%
6.6%
6.8%
6.6%
6.6%
6.1%
6.0%
5.9%
5.8%
5.6%
5.9%
5.9%
5.8%
5.8%
5.8%
6.0%
6.5%
6.2%
6.3%
6.3%
5.7%
58%
59%
60%
61%
62%
63%
64%
65%
66%
5%
6%
7%
8%
9%
10%
11%
12%
13%
5
Unemployment and Participation rates Ages 15+
Source: CBS
Participation rates (RHS)

6. 6
Employment Rate Ages 15+, 2013
Source: OECD
59.8%
55.2%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%

7. Israel, as percent of weighted average of G-8 advanced economies, 1995-2011
50%
60%
70%
80%
90%
100%
income per person
productivity per person
productivity per worker
productivity per hour worked
Source: PWT 8.0 database, Michael Sarel’s calculations
7

8. Competitiveness (e.g. where can the next improvements in productivity come from?)
0
20
40
60
80
100
120
140
160
180
0
10
20
30
40
50
60
70
Rank in “doing Business” measures, Israel & high-income OECD countries
(lower numbers indicate a better rank)
Ease of Doing Business Rank (lef axis)
Getting Credit
Paying Taxes
Protecting Minority Investors
Enforcing Contracts

9. 0.46
0.54
0.49
0.34
0.39
0.38
0.36
0.2
0.25
0.3
0.35
0.4
0.45
0.5
0.55
0.6
9
Gini index for inequality* 1988-2010
Source: National Insurance Institute of Israel, CBS
*Concatenated series which correct for changes to the settings and definitions, except the data for 2012.
Economic income inequality
Net income inequality

10. 69.7%
59.7%
50.3%
20.3%
23.0%
23.1%
9.9%
17.2%
26.6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2009
2034
2059
Ultra-Orthodox Jews
Arabs
Jews, excluding Ultra-Othodox
Macroeconomic background
Adverse Demographic Dynamics
Unprecedented demographic changes, expected to occur in the coming decades, pose complicated challenges.

11. 0
1
2
3
4
5
6
7
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
11
Budget Deficit Targets (as percent of GDP)
Targets 2009
Targets 2013
Targets 2014

12. 12
Prosperity-Promoting Policies
Market-friendly vs. government-controlled economy
Flexible labor markets vs. excessive regulation and “workers’ rights”
Professional, long-term considerations vs. political, populist, short-term approach
The role of public education

13. 80
90
100
110
120
130
140
150
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Figure 1. Real Apartment Prices
(In terms of the Consumer Price Index, excluding housing)
Index (1994 = 100); data refer to January of each year

14. 10.9
11.7
12.0
12.0
12.4
12.8
13.0
13.1
9
10
11
12
13
14
2006
2007
2008
2009
2010
2011
2012
2013
Figure 2. Per capita housing services share of GDP
(in thousands of shekels per capita, chained data, 2010 prices)

15. 80
85
90
95
100
105
110
115
120
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Figure 4. The ratio between apartment prices (the value of the property) and rental prices (the value of housing services)
Index (1999 = 100); data refer to January of each year

16. 68.8
84.1
78.7
79.1
78.4
73.8
69.8
68.6
63.1
54.1
38.6
0
10
20
30
40
50
60
70
80
90
All
households
10st decile
9st decile
8st decile
7st decile
6st decile
5st decile
4st decile
3st decile
2st decile
1st decile
Figure 5. Percentage of households living in own apartments

17. 974
2,035
1,406
1,233
1,090
947
815
774
618
497
331
0
500
1000
1500
2000
2500
All
households
10st decile
9st decile
8st decile
7st decile
6st decile
5st decile
4st decile
3st decile
2st decile
1st decile
Figure 7. Value of an owned apartment (in thousands of shekels) – the average for all households in each decile

18. The 0% VAT proposed policy
From a political economy perspective – almost impossible to terminate it in the future
Imposes a huge fiscal cost – at least 50 billion NIS in the first 20 years
There is no such thing as a free lunch – the plan will necessarily result in higher tax rates and/or lower level of public services  higher burden on the population
Creates new distortions in the tax system  high probability of additional VAT exemptions  higher tax rates  negative impact on growth
Requires a cumbersome and expensive system of price controls
Even with such a system, some (or even most) of the benefit will go to homebuilders
The rest of the benefit will go to high-income households

19. In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, - at the risk of a small present evil.
That Which is Seen, and That Which is Not Seen
Frederic Bastiat, 1850
The zero-VAT plan is not intended for economists
Yair Lapid, 2014