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

2 1. The Israeli Society 2. Inequality 3. The Political System 4. Historical Background 5. Irregularity in Expenditures 6. Fiscal Rules 7. Summary IMF – Conference on Fiscal Frameworks May 2009

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

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

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

6  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 Historical Background

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

8 Fiscal Rules are Keys to: oAchieve Fiscal Discipline oIncrease Long-Term Stability oImprove Credibility oSupport Public Sector Efficiency Fiscal Rules

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

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

11 Thank you!