Israeli Economy 2013

From a $1 Cup of Coffee to a $10.9 Billion Budget Deficit

High-tech people never had it better, poor people never had it worse.

It’s a cliche but it’s true: 2013 was the best of times and the worst times for Israelis. For working Israelis it was the best time of times if you worked in high-tech. Another positive: Unemployment was at its lowest point in decades. But it was the worst of times for many two-income families, whose poverty rate increased.

It was a great year for investors, who watched the Tel Aviv Stock Exchange set a record high. It wasn’t a great year for the bottom 10% of society; Israel remained one of the worst countries in the poverty rankings among developed countries. In the middle were consumers who enjoyed big savings on cellphone service and coffee but still pay more for goods and services than Europeans and Americans.

For Finance Minister Yair Lapid it was the worst of times when he entered office in the spring staring at a massive budget deficit. By the fall, times were better as a tax windfall and lower spending gave him room to cancel a tax hike.

It was a great year for the scented-candle industry, which counted the prime minister and his family as a big customer. It was an annus horribilis for Nochi Dankner, the tycoon who lost control of his IDB group this month.

With a few days left to go, here’s 2013 number by number.

38 billion shekels

This was the government’s huge budget deficit at the beginning of the year ($10.9 billion at current exchange rates). It sure shocked Lapid.

Still, the year is ending with a pleasant surprise: a 6-billion-shekel tax surplus, thanks in part to the release of 60 billion shekels in so-called trapped profits attributable to the massive tax breaks enjoyed by the country’s largest firms. This contributed 4.3 billion shekels to government revenue and let Lapid cancel next year’s planned tax hike.

Also, the 2013 deficit, now estimated at 30 billion shekels, was much lower than forecast – and there are still 62 billion shekels in trapped profits to be tapped.

400 million shekels

The government increased its tax intake by this much after tweaking its formula for so-called green taxes linked to fuel efficiency. The price of a new car went up by between 1,000 and 5,000 shekels even though Transportation Minister Yisrael Katz promised that cars would be 20% cheaper.

6 billion shekels

It may be hard to believe, but this was the sum cellphone customers saved after the market was opened to new competition. The average price for an unlimited-use plan is now 86 shekels a month; the cheapest is under 50 shekels. Heavy users often paid more than 1,000 shekels a month before the market reform. Savings amounted to 3,000 shekels a year for the average household.

20,000 shekels

That was the combined monthly income of the fictional Riki Cohen and her husband, whom Lapid conjured up to depict the plight of the middle class. Sure, the number is only slightly more than double the average monthly income of 9,200 shekels, but it’s a lot more than double the median monthly income of 6,500 shekels.

Cohen is a teacher, so she earns less than the average 14,900 shekels a month paid to the 61,000 workers in the public sector. The best-paid employee in the public sector is an unnamed doctor at Sheba Medical Center, who takes in 117,000 shekels a month. According to the Organization for Economic Cooperation and Development, Israel remains among the countries with the worst income inequality.

Five shekels

Upstart cafe chain Cofix is offering a cup of coffee at this price after the other large chains had gotten us used to paying 10 to 14 shekels. The large chains have apparently been colluding on prices, a matter now under investigation by the antitrust authority. In any case, competition seems to have won the day. Several chains have lowered prices to 8 shekels and have come up with other specials.

But the high cost of living won’t be solved by discounters when market failures exist. The OECD found that Israeli food prices are 25% higher than the average in the organization, with dairy products costing 40% more. And while cheese can’t be sent through the mail, clothing, gadgets and toys can. Many Israelis have found this a solution for the high cost of living, with the postal service reporting a 90% jump in the number of packages arriving from overseas.

1.75 million

That’s the number of Israelis living in poverty – relative to the population the worst showing among developed nations, according to the OECD. The future doesn’t look any brighter considering that the number of Israeli children in poor families is 860,000 – 33.7% of the country’s children – and that 5% of two-income families live under the poverty line, compared with 2% in 1999. The problem is particularly acute in the ultra-Orthodox and Arab communities, which account for about half the country’s poor households.

The high poverty rate contrasts with the unemployment rate, which at 6.1% – 198,800 people – is Israel’s lowest in 30 years. And with expected public spending on social services at just 15.8% of gross domestic product, compared with an OECD average of 21.9%, poverty remains a problem.

136 months

That’s the number of average monthly salaries it takes to buy a roof over your head, up from 132 months a year earlier. Home prices averaged 1.26 million shekels in 2013, a 5.3% increase on the year. Since 2008 the average price of a home has climbed 50.5%. Tenants didn’t have it easy in 2013 either. Average monthly rent climbed to 3,466 shekels from 3,288 shekels.

1 billion shekels

That’s the annual savings consumers should have enjoyed on their electric bills from reforms at Israel Electric Corporation and the power industry. Consumers will have to wait. This week the measures in the 1996 Electricity Sector Law, which would restructure the IEC, were postponed for the 11th time. The government has set up another committee for yet another reform strategy, which includes 2,000 job cuts.

3.75%

This is the OECD’s estimate for Israel’s economic growth in 2013, one of the highest rates in the developed world, with a whole percentage point provided by the country’s nascent offshore natural gas industry. The bad news: Productivity has been dropping compared to the rest of the world; it’s now 24% below the OECD average.

1,345 points

The Tel Aviv Stock Exchange’s TA-25 index of blue-chip stocks reached its highest level in five years at 1,345 points, generating healthy returns of 8% to 10% for pension funds.

Such strong economic indicators and the slow U.S. recovery have cast a pall over the shekel-dollar rate, at least for exporters. Despite the Bank of Israel’s efforts to stem the tide, the dollar weakened 7% in 2013 and dipped below 3.50 shekels in December, making life even harder for exporters like high-tech outfits.

$2.05 billion

That’s the sun Warren Buffett paid to acquire the remaining 20% of the Iscar metalworking company, giving his Berkshire Hathaway 100% of the $10 billion company.

Other notable achievements by the Israeli economy in 2013 included the 2.9 million tourist arrivals, the best showing in recent years, and the $6 billion in exits by owners of high-tech firms, topped by the $1 billion sale of Waze to Google. Another success was the $127 million raised by startup Wix in its November debut on Wall Street. Within the month the company was worth $1 billion.

33.5%

This percentage of Israeli high school students will probably be shut out of the booming high-tech sector after failing their PISA math exams, a global benchmark of school performance. The OECD, which administers the tests, said failing students have a hard time finding their feet in the economy.

Israel’s performance here was among the worst in the West. When one-third of Israeli children come from poor families and only half of high school graduates pass their matriculation exams, we don’t need the OECD to tell us that the problem is bigger than the education system can handle.

10

That’s the number of years it took Nochi Dankner to wreck the IDB group after borrowing hundreds of millions of dollars from Bank Leumi and the Mivtachim pension fund to gain control in 2003. After raising tens of billions of shekels from the public, some of which will never be returned, Dankner was sent packing with hundreds of millions in private debt and zero assets.

Dankner fell just as the Business Concentration Law was being enacted by the Knesset. Meanwhile, Effie Rosenhaus, the chief executive of IDB’s Super-Sol supermarket chain, was convicted on antitrust charges. (During the investigation, Dankner tried to convince the antitrust authority to close the case in exchange for a fine of 20 million to 30 million shekels.) Also, Dankner’s cousin Danny Dankner was convicted of fraud and sentenced to a year in prison.

6,000 shekels

That’s the sum Prime Minister Benjamin Netanyahu and his wife spent on scented candles. Their water bill reached 80,000 shekels – chump change: There was again talk of acquiring an Israeli version of Air Force One costing 140 million to 180 million shekels, not including 5 million shekels in annual maintenance costs. The government set up a committee to study the idea.

58.4 billion shekels

The 58.4-billion-shekel defense budget approved by the Knesset was reduced to 57.7 billion shekels for 2014. But defense officials don’t like restrictions. They have needs that politicians and bureaucrats can’t be expected to understand. This week we learned that the Knesset Finance Committee raised the 2014 defense budget by 5 billion shekels to 62.7 billion shekels – and the year hasn’t even begun.

Yuval Tebol
Olivier Fitoussi