Title page
Contents
Foreword 4
Executive Summary 9
1. Key policy insights 14
Economic growth is robust but risks are elevated 17
Monetary policy has been tightened 20
Financial market risks should be monitored 21
Addressing short and long-term fiscal policy challenges 23
Tax reform to enhance equity and efficiency 26
Increasing spending efficiency 29
Preparing the health care sector for future challenges 33
The COVID-19 pandemic demonstrated the strength of the health care sector but also exposed some challenges 33
Ensuring adequate numbers of health care workers 36
Ensuring equal access and efficiency in the health care sector 39
Accelerating the digital transformation to boost productivity 44
Improving communication infrastructure and digital government services for all 46
Fostering digital skills, competition, and intangible investment 49
Transitioning to carbon neutrality 54
References 61
2. Addressing labour market challenges for sustainable and inclusive growth 66
Demographic change and labour market duality put future growth at risk 67
Demographic developments challenge future growth 67
Labour market disparities are large 69
Raising labour market participation 74
Providing work incentives through the tax and benefits system 74
Improving women's participation in all segments of the economy 79
Improving skills for all 81
Levelling differences in the schooling system 81
Broadening participation in tertiary education 84
Embedding high-quality vocational and educational training in a national qualifications framework 87
Increasing job mobility and improving labour allocation 92
Better job mobility helps workers, employers, and improves overall efficiency 92
Reducing regulatory barriers to job mobility 96
Addressing labour shortages and improving inclusion in the high-tech sector 98
Improving information provision in the labour market to increase job mobility 101
Alleviating geographical mismatches 102
Lifting the productivity of jobs at the bottom 106
References 110
Table 1. Economic growth is moderating 10
Table 1.1. Macroeconomic indicators and projections 19
Table 1.2. Events that could lead to major changes in the outlook 20
Table 1.3. Illustrative fiscal impact of recommended reform package 27
Table 1.4. Illustrative impact of reform package on GDP per capita 27
Table 1.5. Past OECD recommendations on fiscal and tax policies and actions taken 33
Table 1.6. Past OECD recommendations on product markets and innovation policy and actions taken 53
Table 1.7. Past OECD recommendations on environmental policies and actions taken 58
Table 1.8. Recommendations on macroeconomic and structural policies 59
Table 2.1. Recommendations for addressing labour market challenges 109
Figure 1. The economy has been resilient 10
Figure 2. Labour income disparities are large 11
Figure 3. Reaching environmental targets requires accelerated policy action 12
Figure 1.1. The economy has been resilient 15
Figure 1.2. Israel is a two-speed economy 16
Figure 1.3. Aggregate productivity convergence has been slow 16
Figure 1.4. Poverty is high and socioeconomic gaps remain wide 17
Figure 1.5. The labour market is tight 18
Figure 1.6. Inflation has increased above the target 21
Figure 1.7. The banking system appears sound 22
Figure 1.8. The real estate market poses risks 23
Figure 1.9. Israel's core infrastructure stock lags significantly behind that of other countries' 24
Figure 1.10. Illustrative debt scenarios 25
Figure 1.11. The tax mix relies more heavily on consumption and property 28
Figure 1.12. Primary civilian expenditure is low 30
Figure 1.13. Perceived corruption is above the OECD average 32
Figure 1.14. The mortality impact of the pandemic has been similar to that in many OECD countries 33
Figure 1.15. The vaccination campaign was very fast 34
Figure 1.16. Overall health outcomes are strong but substantially weaker for Israeli-Arabs 35
Figure 1.17. Health care resources are lower than in most OECD countries 37
Figure 1.18. Many physicians head for retirement and too few new physicians are trained 37
Figure 1.19. The supply of physicians has increased but is insufficient to keep up with population growth and ageing 39
Figure 1.20. Total health expenditure is low 40
Figure 1.21. Public health expenditure is low and voluntary private insurance widespread 41
Figure 1.22. Health sector wages are high and increasing fast 42
Figure 1.23. The digital divide is large 45
Figure 1.24. Firms in traditional sectors lag in the adoption of digital technologies 46
Figure 1.25. Broadband connections vary widely across regions 47
Figure 1.26. High-speed broadband connections lag behind peers 47
Figure 1.27. The digitalisation of the government is advanced 48
Figure 1.28. Average digital skills are weak and ICT training low 50
Figure 1.29. Product market regulations can be improved in several areas 51
Figure 1.30. Direct government R&D support is significant but concentrated in a few sectors 52
Figure 1.31. Greenhouse gas emission intensity has fallen but air pollution remains a concern 54
Figure 1.32. Reaching environmental targets requires accelerated policy action 55
Figure 1.33. Carbon taxation should be broadened 57
Figure 2.1. Employment growth has been driving Israel's growth since the 1990s 67
Figure 2.2. The labour market recovered quickly from the pandemic 68
Figure 2.3. Demographic change puts pressure on future employment and growth 68
Figure 2.4. Employment is still concentrated in low-productivity sectors 69
Figure 2.5. Income inequality is high 70
Figure 2.6. Large labour market gaps exist in employment, hours and wages 71
Figure 2.7. The gender pay gap is one of the highest in the OECD 72
Figure 2.8. Distribution of budget allocation of the Economic Plan for the Arab Society 73
Figure 2.9. The unemployment insurance system provides strong work incentives 75
Figure 2.10. The incidence of long-term unemployment is low 75
Figure 2.11. Skills mismatch is high 76
Figure 2.12. ALMP spending is low 77
Figure 2.13. The share of working poor is high 78
Figure 2.14. Israel performs average in advanced educational credentials, but lags in skills 82
Figure 2.15. Large inequalities exist in education provision across groups 83
Figure 2.16. Many university students choose STEM subjects, but some groups still lag behind 85
Figure 2.17. A high share of young Arab men are not in education, employment or training (NEET) 86
Figure 2.18. Take-up of VET is low 89
Figure 2.19. More young people aspire to skilled professions than in most other countries 90
Figure 2.20. Work-based learning is low 90
Figure 2.21. Wages in the high-tech sector have diverged from the rest of the economy 92
Figure 2.22. Wage inequality between firms and industries is high 93
Figure 2.23. Job mobility is relatively low 94
Figure 2.24. Women, Arab-Israelis and Haredim are underrepresented in high-tech 95
Figure 2.25. Mobility restrictions in professional services are high 97
Figure 2.26. The minimum wage is set at intermediate levels 97
Figure 2.27. The labour market is chronically tight in the high-tech sector 99
Figure 2.28. The supply of graduates in high-tech fields is rising 100
Figure 2.29. High-productivity, high-wage industries are clustered in a few prosperous regions 103
Figure 2.30. Mobility towards economic centres is lower than in other countries 104
Figure 2.31. Public transport is underutilised in Israeli cities 104
Figure 2.32. Israel is a leader in research and development, but innovation is heavily skewed across sectors 107
Figure 2.33. Israeli industries have a low degree of capital deepening 108
Boxes
Box 1.1. Quantifying the impact of selected policy recommendations 27
Box 1.2. Overview of the Israeli health care sector 35
Box 1.3. Drivers of Israel's fast vaccination campaign 36
Box 1.4. OECD countries use a wide range of policies to help SMEs digitalise 53
Box 2.1. The economic plan to reduce social gaps in the Arab society by 2026 73
Box 2.2. The VET System in Israel 88
Box 2.3. The European Qualifications Framework (EQF) 91
Box 2.4. Wage dispersion between firms as a symptom of business sector duality 93
Box 2.5. Labour market discrimination 95
Box 2.6. The role of the Israel Defence Forces (IDF) in building a high-tech workforce 101