On 21 March 2022 the IMF published a report on Israel following discussions under Article IV of the IMF’s articles of agreement.

Israel’s economy has withstood the shocks of the crisis caused by the pandemic. Government support was available to households, businesses, and the health system and the vaccination campaign helped to mitigate the impact of the pandemic.

Although there was a slight downturn in the economy in 2020, economic growth resumed in 2021 and the GDP has already overtaken its pre-pandemic level with 8.2% growth in 2021, led by consumption and the high-tech sector. Owing to high tax revenues, the fiscal deficit was smaller than expected in 2021 and public debt decreased to 69% of GDP.

A current account surplus of 4.6% of GDP was driven by exports of high-tech services. Unemployment fell close to pre-pandemic levels, with high job vacancies in all sectors. The economic outlook is subject uncertainty owing to the geopolitical situation. The recovery is expected to continue in 2022 and into the medium term with economic growth supported by private consumption, investment, and net exports.

In the medium-term, the IMF considers that Israel should focus on reducing public debt. Government plans to restrain expenditure may be difficult to implement in view of the current low level of spending, and the IMF considers that a review of public spending would therefore help.

There is room for increasing tax revenues by broadening the tax base and by increasing the progressivity of the tax system. Increased tax revenue would support further spending to increase economic growth.

Israel should review the fiscal framework to ensure that the fiscal rules are still appropriate, and assess the necessary size of fiscal buffers, taking into account the possibility of exceptional events. Israel should also assess the potential usefulness of establishing an independent fiscal council.

Productivity and reallocation of labour could be improved by targeted structural reforms, with improved vocation training and alignment of qualifications with the needs of the labour market. More efficient resource allocation and investment could be achieved by reduction of trade barriers and dismantling of red tape. Improvements in physical and digital infrastructure could be accelerated.

To meet the climate objectives, Israel could consider greater increases in carbon prices and more regulatory and fiscal support for innovative environmental technology.