The Bank of Israel’s Governor Karnit Flug called on the Israeli government to make use of Israel’s strong economic position to invest in the nation’s infrastructure and human capital to support the future growth of the economy, rather than to cut taxes.
The level of investment in infrastructure in Israel “is markedly below that of most advanced economies,” Flug said at a press conference in Jerusalem Wednesday, as the central bank presented its 2016 annual report. “Significant and efficient investment” in both human capital and infrastructure are required to increase the productivity of all Israeli citizens and is the key to increasing the potential growth of the economy and the standard of living of its citizens.
Israel’s robust macroeconomic situation “presents precisely the opportunity to adopt such a policy,” she added.
Israel’s economy grew by 4 percent in 2016, higher than most other advanced economies. The robust growth, in addition to the recent $15-billion acquisition by Intel Corp. of Israel’s Mobileye, have prompted Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon to say they plan to lower taxes for Israeli citizens.
In January, Kahlon said he would consider tax reductions if tax revenues continued to exceed expectations.
“If we are talking about high tax revenue because of temporary and one-time phenomena — as in the case of Mobileye, or an unusual increase in the import of cars — then it is clear we would not want to cut taxes permanently as a result of this,” Flug said.
Last month, Flug said it would be wiser for the government to spend any excess revenue from taxes on improving social services.
“The main challenge faced by policy makers in the coming years is to ensure that growth is based, to a much greater extent, on increasing labor productivity while reducing inequality in the economy,” Flug wrote in her forward to the report. This requires increased spending on education — including technological education — and professional training, as well as investment in public infrastructures. These two areas “significantly lag behind the needs,” Flug added.
Flug also said that political instability and short-term governments in Israel hurt the economy, because of the short-term perspective of the policy makers.
The governor’s remarks came as Netanyahu and Kahlon met on Wednesday in another attempt to broker a solution to the growing crisis over the new broadcasting authority, which is threatening to break apart the coalition and lead to early elections.
Government investment on infrastructure — land transport, sea and air ports, communication, electricity/energy, and water — increased in 2007, but declined sharply after a deficit increase in 2012, which forced the government to cut back on expenditure, the central bank said.
“Expenditure per student in the education system is not sufficient, and can be seen in Israel’s relatively low standing compared with advanced economies, both in student achievements and in terms of the inequality among them. This inequality indicates that the system does not sufficiently rectify the gaps deriving from differences in students’ socioeconomic backgrounds,” continued Flug.