The Israeli economy has been resilient to the shock of the 7 October terror attacks and subsequent conflicts, due to its sound fiscal position before the attacks, effective monetary management, a solid financial system and strong growth potential. Policy should focus on curbing inflation and containing fiscal deficits while funding future spending needs and tackling the high cost of living, according to a new OECD report.
The latest OECD Economic Survey of Israel says that GDP growth is expected to pick up to reach 3.4% in 2025 and 5.5% in 2026. Inflation has been contained, yet pressures remain. Both headline and core inflation remain slightly above the 1-3% target-range of the Bank of Israel. Monetary policy should remain tight to curb inflation.
The fiscal balance has deteriorated due to rising public expenditures in response to the ongoing conflicts. Maintaining fiscal discipline, relying on the least distortionary taxes to raise revenue and using spending reviews to prioritise expenditure, will be key.
"Removing barriers to domestic and foreign trade, by cutting red tape and easing border processes, would strengthen productivity, increase incomes and lower consumer prices in a durable way" OECD Secretary-General Mathias Cormann said, presenting the Survey in Jerusalem alongside Israel's Minister of Finance Bezalel Smotrich. "Given demographic trends, long-term economic performance rests on reforms to address infrastructure gaps and improve educational and labour market outcomes across the Israeli population."
Pro-competition reforms should be pursued and state involvement in the economy diminished. Less stringent product market regulations would facilitate market entry for new companies and help foster competition. Negotiating new free trade agreements and deepening existing treaties will reduce trade costs. Continuing to remove technical barriers to trade would further enhance competition and reduce import costs.
The economy can capitalise on a strong artificial intelligence (AI) industry by maintaining Israel's flexible regulatory approach, which has supported strong growth to date. Strengthening higher-education institutions in AI-relevant fields and strengthening their links with firms will also help to boost AI growth.
Ensuring school funding is conditioned on teaching the core curriculum and ensuring adequate funding per pupil considering schools' socio-economic characteristics would improve labour-market performance. Removing benefits that discourage work among ultra-orthodox men would also boost employment.
Efforts to decarbonise the economy will need to involve all sectors, including power generation and buildings. The newly introduced carbon tax provides a strong basis to incentivise a reduction in greenhouse gas emissions. Increasing the carbon tax rate on natural gas would accelerate the decarbonisation of power generation, which accountings for half of total greenhouse gas emissions.
