How does the Political Context in Israel Constrain which

Fiscal Rules are Best?

Yarom AriavDirector General

May 2009

Ministry of Finance

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1. The Israeli Society2. Inequality3. The Political System4. Historical Background5. Irregularity in Expenditures6. Fiscal Rules7. Summary

IMF – Conference on Fiscal Frameworks May 2009

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Heterogeneous Society: Arab minority Ultra-Orthodox Immigrants

Every Group Has It’s Special Needs and Demands

The Israeli Society

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High Overall Inequality Inequality among Ethnic Groups Center Vs. Periphery

Specific Attention and Pressure Groups

Inequality

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Parliamentary System

Proportional Voting

Low Threshold (2%) – Large Number of Parties

Political Instability, Coalition Regime

The Political System

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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

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Sensitive Geo-Political Situation

Absorption of Immigration Political Instability

Irregularity in Expenditures

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Fiscal Rules are Keys to:oAchieve Fiscal Discipline o Increase Long-Term Stabilityo Improve CredibilityoSupport Public Sector

Efficiency

Fiscal Rules

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Simplicity Transparency Based on Actual Developments

rather then on Forecasts Credible Not Pro-Cyclical

Fiscal Rules- Principles

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Unique Political and Social Characteristics

Continuous Pressures on the Budget and Fiscal Stability

Importance of Keeping Fiscal Rules

Summary

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Thank you!