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

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

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

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

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

6. 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

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

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

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

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

11. Thank you!