For years, Israelis have gotten used to the idea that the Israeli economy is a near unstoppable story of success. High-tech is thriving, unemployment rates are relatively low, and the economy showed remarkable resilience in the face of security, political and health crises. However, these encouraging points of data hide a more concerning long-term trend: a projected prolonged slowdown in quality of living’s rate of growth.<\/p>\n\n\n\n
A comprehensive study we conducted, and are now publishing, reveals that the main threat to the Israeli economy is not a financial crisis, inflation, or temporary recession, but deep structural problems: demographic changes, large disparities in human capital, burdensome regulation, difficulties in the housing and transportation markets, and a governance structure that does not always encourage efficiency and growth.<\/p>\n\n\n\n
In the scenario we forecast, the growth rate of GDP per capita is expected to gradually decline to only about 1% per year by the middle of the century, even if Israel maintains macroeconomic stability and a strong high-tech sector. This does not mean a decline in the standard of living, but rather a slower rise in the standard of living compared to other advanced countries.<\/p>\n\n\n\n
To address this challenge, the government that comes into power in the upcoming elections will need to pass a package of 25 critical structural reforms, divided into five key areas: education and human capital, the labor market and the public sector, taxation and savings, competition and regulation, and governance and state capacity.<\/p>\n\n\n\n
We chose a growth model based on a production function to assess the cumulative impact of the reforms, taking into account overlaps and mutual effects between them. According to the central estimate, full implementation of the reforms is expected to increase GDP per capita by 7.2% within three years, 28.5% within 13 years, and 56% within 33 years, compared to a scenario in which the reforms are not carried out.<\/p>\n\n\n\n
Among the reforms that contribute the most are the introduction of core curriculum studies and basic skills throughout the education system; an integrated reform in planning, housing, and transportation; the expansion of school autonomy and changing the structure of teacher employment; and a reduction in the regulatory burden and barriers to entry for businesses.<\/p>\n\n\n\n
To understand the true significance of these measures for Israeli citizens, it’s worth diving deeper into the recommendations that make up these policy clusters. In the education and human capital cluster, the most significant long-term reform is intended to make public funding for educational institutions conditional on measurable achievements in core curriculum subjects and basic skills, such as mathematics, English, science, and digital literacy. This is an incentive-based economic tool rather than one of administrative coercion, designed to address the current underinvestment in human capital and prevent its harm to future earning capacity, particularly in the Haredi and Arab sectors. Alongside this, it is proposed to expand parents’ freedom of choice in schools, grant broad managerial and budgetary autonomy to school principals, and move to a flexible teacher employment structure that rewards excellence and performance, replacing the rigid seniority mechanism in place today. In the same cluster, it is also recommended to liberalize higher education, allowing flexible salary structures for faculty and removing the barriers to establishing innovative institutions with private funding.<\/p>\n\n\n\n
In the labor market and public sector cluster, the goal is to inject flexibility into rigid systems and improve the allocation of workers in the economy. The reform proposes updating outdated labor legislation, abolishing the special, historical status of Ottoman-era associations for veteran workers’ organizations, and requiring all organizations to maintain financial transparency and internal democracy. It is also proposed to regulate and restrict strikes in essential services such as health, energy, and transportation through mandatory arbitration mechanisms, and to change the employment structure in civil service so that recruitment and promotion of employees are based on professional excellence and managerial autonomy.<\/p>\n\n\n\n
In the taxation, competition, and governance clusters, measures are proposed aimed at stimulating economic activity and streamlining public systems. In the area of taxation, this involves improving the direct tax structure by lowering tax rates and broadening the tax base, alongside simplifying VAT and implementing a comprehensive reform of pension taxation and budgetary pensions in order to strengthen the state’s fiscal sustainability. In the area of competition and regulation, alongside reducing the bureaucratic burden on businesses and opening sectors such as agriculture to competition, we propose an integrated and critical reform in planning, housing supply, and transportation, in order to connect Israel’s geographical periphery to employment centers. Finally, in order to strengthen state capacity, the study recommends streamlining the structure of government by reducing the number of ministries and ministers, increasing fiscal transparency and moving to full budgetary accounting, and decentralizing to local government powers and fiscal autonomy.<\/p>\n\n\n\n
Structural reforms are not a magical formula that can create rapid growth overnight. Their impact is rather cumulative over years, through improving human capital, enlarging labor participation, encouraging investment and upgrading public institutions. As such, these reforms are aimed at placing the economy on the path to higher productivity and income rates.<\/p>\n\n\n\n
Many of the reforms will likely face criticism. Some of them touch on issues that are socially and politically sensitive, among these, core curriculum studies, structural changes to the public sector, opening industries to competition and regulation reduction. The quantitative estimations themselves are dependent on assumptions about the degree of impact and rapidity of implementation.<\/p>\n\n\n\n
And yet, even critics of our recommendations may agree with the point of departure: Israel’s central challenge in the coming decades is not how to cope with an immediate economic crisis, but how to prevent gradual erosion in growth capacity and standard of living. Perhaps this is also the study’s most important contribution: shifting the public debate from the question of how to divide the fruits of existing growth, to the question of how to ensure there will be enough fruits to divide 30 years from now.<\/p>\n\n\n\n