The International Monetary Fund lauded Israel’s economic performance in a report released Wednesday, but took issue with some of the reforms Finance Minister Moshe Kahlon has introduced in the housing market and warned that the government wasn’t doing enough to contain deficits.
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The IMF noted that home prices had doubled since 2007, rising 8% in the last year alone, and there was little sign that supply was increasing quickly enough to meet demand. It expressed concern that high housing prices reduced the amount of money available for other necessary spending.
Kahlon has taken steps to deter people from buying homes for investment and launched the Mahir Lemishktaken (Buyer’s Price) plan to sell state land at a discount to developers. But the IMF said the measures wouldn’t have a long-term effect.
“Although recent tax measures may dampen price rises in the near term owing to investor sales, without a supply change the price trend is unlikely to be altered significantly,” the report said. “The Buyer’s Price scheme helps households purchase a first house, yet it benefits relatively few households that win a lottery, and comes at significant off-budget fiscal cost.”
It urged incentives for municipalities to release more land for residential construction, faster construction approvals and better public transportation to alleviate pressure for housing in the center of the country.
Israeli gross domestic product grew a strong 3.8% last year, boosted by a surge in car imports and record-low unemployment. The IMF said it expects GDP to continue growing at around 3% in the medium term but added it saw “significant risks” from regional tensions and the risk of slowing economies in Israel’s main export markets. It also expressed worry about bottlenecks creating by low labor participation rates and productivity for Arabs and ultra-Orthodox Jews.
Kahlon has cut taxes and has said he is weighing further reductions this year as a surge in tax revenues enables the government to end the year with a lower-than-expected deficit and a drop in debt relative to GDP.
But IMF officials issued a warning about fiscal policy, saying that preexisting spending commitments spell budget deficits rising to about 3% of GDP in coming years. As a result, Israel’s debt-to-GDP ratio, which has been falling, is now projected to rise 1.5 percentage points in the next five years, “to a level that exceeds the advanced economy median.”
The IMF made special mention of the need to raise the skills and training of Israel’s Haredi and Arab populations, noting that while they comprise 26% of the population they account for 43% of primary school children and will make up a bigger part of the workforce in the future.
Spending on program to train Haredi men and Israeli-Arab women — the two main problem areas — is just 0.2% of GDP, which is insufficient to solve the problem. While Israel’s minimum wage has risen to among the highest in the developed world, relative to average wages, more work should be done to promote negative income tax to help the poor, the IMF said.