The Israeli Economy January 2012 Ministry of Finance

Main Economic Indicators

Strong and sustainable GDP growth Labor market Moderate levels of inflation Eight years of consecutive surplus in the current account

GDP Growth Percentage Per Annum *Budget Estimate was 4.0% Source: Central Bureau of Statistics, Ministry of finance

Unemployment and Participation Rates Participation rate (right axis) Unemployment rate (left axis) Source: CBS 57.3%

6 Source: Bank of Israel Year-End Inflation Rate Central Bank’s Key Interest Rate Today = 2.75% Inflation is Under Control

Balance of Payments - The Current Account US$ Billions & As Percent of GDP Source: CBS. * First three quarters annualized

Fiscal Policy

 Expenditure growth is derived from two elements:  Distance from debt target  Permanent long term growth The New Fiscal Rule Debt/GDP ratio Expenditure growth rate= 60% * Average Growth Rate of 10 Years 2014 onwards %1.5%2.0%3.0%5.5%6.0%  No change in the deficit ceiling  One always functions as the effective limitation

General Government Expenditure As a percentage of the GDP Source: CBS, The Ministry of Finance

General Government Expenditure As a percentage of the GDP, International comparison 2010 * Weighted average; Source: OECD

Tax Burden of the General Government 2009 % of GDP Source: OECD, Ministry of Finance

Public Debt As a percentage of the GDP *Estimated Figures for 2011 Source: The Ministry of Finance

Public Debt Increase Between the years As a Percentage of the GDP, International comparison Maastricht: 60% Debt Source: OECD Outlook 90, Israel MOF

Central Government's Budget Deficit As a Percentage of the GDP, actual and according to the scheme * According to the Deficit Reduction and Budgetary Expenditure Limitation law 1992 Source: CBS, the Ministry of Finance ** Fiscal rule limitation was 3% in 2008 Latest Forecast

Key Economic Policies  Fiscal Responsibility – According to the Fiscal Rule  Encouraging Growth by:  Structural Reforms - Advancing Competitiveness  Active Labor Market Policies  Reducing Bureaucracy  Automatic Stabilizers

Committee for Social and Economic Reform (Trachtenberg Committee)  Tax policy  Cost of living and competitive markets  Priority changes within the expenditure limitation  Housing and real-estate market

Tax policy Legislation has been completed  Cancelling the direct tax reduction scheme (Individual and Corporate)  Raising maximum marginal tax from 44% to 48%  Lowering income tax for incomes between 8-14 thousand NIS a month (from 23% to 21%)  Raising corporate tax from 23% to 25%  Raising capital gains tax from 20% to 25%  VAT will remain 16%  Reducing duty free cigarette allowance  Introducing Tax allowance for fathers  Cancelling the rise in fuel taxes  Increasing negative income tax for women