Ministry of Finance How does the Political Context in Israel Constrain which Fiscal Rules are Best? Yarom Ariav Director General May 2009

IMF – Conference on Fiscal Frameworks May 2009 The Israeli Society Inequality The Political System Historical Background Irregularity in Expenditures Fiscal Rules Summary

The Israeli Society Heterogeneous Society: Arab minority Ultra-Orthodox Immigrants Every Group Has It’s Special Needs and Demands

Inequality High Overall Inequality Inequality among Ethnic Groups Center Vs. Periphery Specific Attention and Pressure Groups

The Political System Parliamentary System Proportional Voting Low Threshold (2%) – Large Number of Parties Political Instability, Coalition Regime

Historical Background Until the 1970’s – A Centralized Mostly Planned Economy, Very Strong Labor Party 1977 – Political Change: Towards a Market Economy, Fiscal Dispersal 1985 – The “Stabilization Plan”: Return to Fiscal Control Fiscal Rules: 1992 – Deficit Reduction Law 2005 – Limit on the Growth of Expenditure

Irregularity in Expenditures Sensitive Geo-Political Situation Absorption of Immigration Political Instability

Fiscal Rules Fiscal Rules are Keys to: Achieve Fiscal Discipline Increase Long-Term Stability Improve Credibility Support Public Sector Efficiency

Fiscal Rules- Principles Simplicity Transparency Based on Actual Developments rather then on Forecasts Credible Not Pro-Cyclical

Summary Unique Political and Social Characteristics Continuous Pressures on the Budget and Fiscal Stability Importance of Keeping Fiscal Rules

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