Macroeconomic Policy Response to the Crisis
Shortly after the outbreak of the COVID-19 pandemic, the Israeli economy, like most economies in the developed world, went into near-full lockdown which caused a substantial decline in economic activity. This lockdown pushed the national economy into the worst crisis in its history. The re-opening of businesses began at the end of April, but the repercussions of the economic crisis are just beginning to emerge.
In a roundtable discussion held by the Aaron Institute over Zoom on July 16, 2020, Prof. Zvika Eckstein gave a presentation summarizing the paper to be presented at the outset of the discussion, surveying the consequences of the crisis on the global and national economy, and the fiscal and monetary response both in Israel and worldwide. This paper's conclusion is that despite the structural deficit, the fiscal situation in Israel is very good and provides policymakers with great fiscal flexibility.
The worldwide interest rate which is expected to remain negative for a long time, the decrease in demands, the strong effect of fiscal policy when the interest is low, and the assumption that massive government investments supporting employment and growth will not push the interest up – all support a recommendation for substantial expansion of investment in growth-enhancing projects. An additional investment of about 2% per year in 2021-2022 is expected to keep the debt-to-GDP ratio under 80%, while facilitating a significant increase in growth rate.
The main areas we propose for investment include expansion of employment programs and career training courses, reduction in bureaucracy and regulation, promotion of digitization, investment in physical infrastructures, and affirmative action for the Arab and Haredi (ultra-Orthodox) population groups.
The Aaron Institute's presentation was followed by comments from the following speakers: Prof. Avi Simhon, Chairperson of the National Economic Council; Prof. Karnit Flug, Vice President of Research at the Israel Democracy Institute, a senior lecturer at the Hebrew University, and former Bank of Israel Governor; Ms. Shira Greenberg, Chief Economist of the Israeli Ministry of Finance; Mr. Shaul Meridor, Head of the Budget Department in the Ministry of Finance; Mr. Andrew Abir, Deputy Governor of the Bank of Israel; Prof. Martin Eichenbaum from Northwestern University; Ms. Israela Mani, Deputy Director General of Economics and Tax in the Israeli Chamber of Commerce; Prof. Omer Moav from the Aaron Institute for Economic Policy, Tiomkin School of Economics, Interdisciplinary Center Herzliya; Ms. Anath Levin, Financial Manager; Prof. Rafi Melnick, Provost of the Interdisciplinary Center Herzliya; and Dr. Marian Tehawkho, Senior Researcher at the Aaron Institute for Economic Policy, Interdisciplinary Center Herzliya.
To view all materials (in Hebrew), click here