Bank of Israel Reveals Worrying Figures

Poverty Rate Among Israeli Working Class Has Soared in Last Decade

Bank of Israel report shows that poverty rate in Israeli households with one breadwinner has grown to 29% from 18.6%, while rate in homes with two earners has nearly doubled from 2.6% to 4.68%.

The poverty rate among the Israeli working population has risen significantly in the last decade and living conditions for these families has worsened, a Bank of Israel report released Tuesday has revealed.

The poverty rate among Israeli households with one breadwinner has grown to 25.9 percent from 18.6 percent compared to a decade ago. The number of poor households with two wage earners also increased considerably, nearly doubling from 2.6 percent in 2003 to 4.6 percent last year. "The lion's share of working poor families have just one wage earner, but the share of such families with two wage earners and more is growing," the bank reported.

A look at impoverished households paints a worrisome picture: While a decade ago 3.9 percent of such households had two wage earners, one in ten poor families now have two wage earners. Overall, there are approximately 441,000 impoverished families, representing 20 percent of all households in Israel.

In unveiling the bank's 2012 annual report, outgoing Bank of Israel Governor Stanley Fischer produced a long list of challenges ahead, starting with what he said was an urgent need to create a sovereign wealth fund for the state's future natural-gas profits, and warning against trying to close the yawning budget deficit with tax hikes alone.

Speaking a day after new Finance Minister Yair Lapid provoked controversy by referring to a hypothetical Israeli woman, "Riki Cohen," who together with her husband earns NIS 20,000 a month, as "middle-class," Fischer said the interests of the poor had to be defended and lauded Lapid as a "serious man" who could do that job.

"I’m confident the government will continue to do that and that the finance minister, who has made an excellent impression on me, will address the problems of all socioeconomic classes," Fischer told a press conference. "I have met with the finance minister few times and my initial impressions are excellent, that he is a serious man."

But Fischer didn't discount the challenges Lapid faces in trying to close a budget gap of some NIS 30 billion. Fischer called Israel's fiscal situation the economy's "main problem."

Israel's gross domestic product is forecast by the Bank of Israel to grow 3.8% this year. While one percentage point of that growth will come from the start of natural gas production from the Tamar field, Fischer noted that at 6.5% unemployment is at its lowest in three decades, while the workforce participation rate is rising. Israel's current account will be in balance, while inflation is forecast to remain within the target range, he noted.

But Fischer signaled that Israel remains exposed to a troubled world economy and that the budget deficit is structural, meaning that is cannot be reduced simply by increasing economic growth. Moreover, the target for this year's deficit, which is 3.6% of GDP, is by no means a sure thing, he said.

"Although we're talking about a low rate relative to other countries, it is less than desirable," he said. "If you recall what happened in 2003, when as a result of a recession the deficit rose to 6% with virtually no increase in spending, we can see that if, heaven forbid, we enter into a recession, the deficit could easily be bigger than in 2003."

On that account, Fischer said Lapid would have a difficult time avoiding tax increases without cutting deeply into the defense budget. But the governor avoided making a specific policy recommendation.

"If we need to keep defense spending at current levels, or even raise it, we need as a country to pay the cost of security," he said. "But I also believe that it would be wrong to shoulder the entire cost of reducing the deficit with higher taxes. We have to preserve the ability of the business sector to operate and contribute to economic growth."

Addressing another area of difficulty, Fischer defended the Bank of Israel's policy of keeping interest rates so low that home buyers were encouraged to take out loans, fanning demand and boosting prices. The central bank has taken steps to cool demand for mortgages, but Fischer said the government should also look at ways to deter people buying homes as speculative investments, including by extending the exemption for the property improvement tax to seven years from four.

Olivier Fitoussi