Abstract
In this chapter, we deal with the unique characteristics of fiscal policy in Israel, between the stabilization program of 1985 and up to 2007. This policy kept one of the largest and inefficient public sectors and directly led to another “lost decade” between 1995 and 2003 and to the return of the “great recession” in the Israeli economy. The crisis called for a new stabilization plan, which stressed drastic contraction of public spending and of tax burden, parallel to a significant reform in conduct, ethics, and norms of the government. The severity of the crisis allowed massive implementation of the reforms with significant results. However, a few years after its successful implementation and the high growth which was achieved, the central tenets of the plan were abandoned, and the Israeli economy deteriorated again.
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Notes
- 1.
See also in this regard Schein (2003), who found that terrorism had much more influence on GDP than the NASDAQ.
- 2.
These findings were contrary to the findings of Kormendi and Meguire (1990), who found that elasticity of public consumption with respect to private consumption is negative, and to the findings of Giavazzi and Pagano (1990), who found that elasticity of public consumption to output relative to private consumption to output is negative.
- 3.
In addition to public consumption and its growth, the explanatory variables included: population, short- and long-term interest rates, the tax burden, world trade, Israel’s export and import price indices, returns to capital and labor (with a constant to capture technological change), the level of inflation and its standard deviation (to capture both general and inflation-related uncertainty), and a dummy variable to capture the impact of the Second “Intifada.”
- 4.
To be legal, a wage contract had to meet the following conditions (among others): the employee was hired through a proper tender, the employee had the requisite qualifications, the wage adhered to the official government wage table, and all taxes were being paid.
- 5.
The top marginal income tax rate was cut from 62.5% to 44%, the corporate tax rate was cut from 36 to 24%, and VAT was cut from 18 to 15.5%.
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Schiffman, D., Young, W., Zelekha, Y. (2017). Stabilization via Government Accounting Reform: The 2003 Program and Politicization of Recovery. In: The Role of Economic Advisers in Israel's Economic Policy. Springer, Cham. https://doi.org/10.1007/978-3-319-60682-8_7
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