Economic Downturn, Growth, and the State Budget – 1998-99

The effects of the decrease in immigration from the former Soviet Union, the restraint, and high real interest rates were compounded by the slowdown in world trade, prompted by the crises in southern Asia, Russia, and South America. The protracted slump warrants the application of a counter-cyclical policy by means of a more expansionary state budget and a less contractionary monetary policy, which would help the business sector break out of the slump and attain a growth rate commensurate with the increase in the labor force and productivity in the years to come. In view of the instability in the world financial system and the rising susceptibility of the Israeli economy to exogenous shocks, however, expansionary measures in general, and budgetary policy in particular, should be applied in moderation, subject to multi-annual targets for public expenditure, derived from the optimum long-term growth potential of the economy.

This paper appears as a chapter in the Center’s annual publication, Israel’s Social Services 1998-99, Yaakov Kop (editor).