Israel is going to have to find the right balance between security spending and investment in its economy and in things that will allow the economy to grow such as education and infrastructure, said Bank of Israel Governor Amir Yaron on Monday at The Jerusalem Post Annual Conference in New York.
“It is clear that a prosperous economy needs security, but security also needs a prosperous economy,” he said.
The governor emphasized that Israel’s economy has a strong foundation and has shown resilience during and after past military events. He also said the economy has already shown signs of recovery. There are, however, still challenges that the country faces that will impact its economy, he explained.
He touched on two challenges Israel faces that he said it must address to maintain a prosperous society – lacking infrastructure, and two Israeli populations that are not in the labor force. Ultra-Orthodox men and Arab women do not participate enough in the workforce, and getting these populations into high-quality jobs will support Israel’s economy, he explained.
If Israel wants to have a prosperous society, it must have more people with better skills and higher earnings going forward, he said.
This means that haredi men must study a core curriculum, he said. This is especially important given the fact that this population is expected to continue to expand and become a much greater proportion of Israel’s population as time goes on, he added.
In comparison to OECD countries
When looking at skill sets, Israel’s highest-skilled deciles were more skilled than the highest-skilled in the OECD, but when looking at low-skilled deciles, this is reversed, and Israel’s weakest are much weaker than the OECD’s weakest, said Yaron.
While Israel is currently on a trajectory that means its debt-to-GDP ratio will not diverge and grow massively, additional expenses or shocks could possibly push Israel onto such a path.
The one-time costs of the war are around 13% of GDP, said Yaron, who explained that the potential ongoing costs are also significant, and could amount to around 0.5% of GDP each year.
There are also more expenses caused by the war, such as spending on rebuilding the South.
The war’s cost will force Israel to make painful fiscal adjustments, which the government has begun to do, but some of which were not approved in the Knesset, he said.
The governor lauded the founding of a committee that will analyze and structure military expenses going forward while regretting that it had not been established sooner. This is important because military expenses are a macroeconomic event, he said.
The fact that Israel’s economy expanded 14% in the first quarter of 2024 after a 22% contraction in the last quarter of 2023 should be comforting and is an indicator of the steadiness and dynamism over time of Israel’s economy, said Yaron. This is a similar rebound to those seen after previous military events in the country, he added.
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