Israel’s economy before and after the coronavirus crisis

As the restrictions from Israel’s initial lockdown and economic closure ease, the conversation around coronavirus in Israel has largely turned to the crisis’s continued health, economic and social implications in the future. What state is our health care system in to face a second wave? How much will the deficit increase? How will the government address the increased needs for welfare and employment support? What kinds of jobs and schools are we and should we be returning to in the wake of the crisis?

But before we go plunging into the unknown of the future, it is important to stop and examine the state of Israel’s economy prior to the crisis. Israel’s relative advantages and disadvantages entering into a crisis that has affected the whole world will be important ingredients in determining how best to exit the crisis and, in the years to come, evaluating various aspects of Israel’s coronavirus response.

This year, the Taub Center’s annual Picture of the Nation 2020, generously supported by the Koret Foundation, does exactly that. It presents a picture of Israel’s society and economy on the eve of the coronavirus outbreak, alongside discussions of its effects – those already felt and those that are expected – on Israel.

Israel’s health system entered the war against coronavirus under favorable demographic and public health circumstances – Israel’s population is both relatively young and in relatively good health. Yet, at the same time, the system was already struggling from insufficient funding, resources, and infrastructure. Furthermore, structural weaknesses put even more strain on an already overburdened acute care hospital system. Future challenges include minimizing the collateral mortality of coronavirus that is likely to follow from people not receiving routine scans and treatments or from medical resources being diverted to address the virus. The crisis also pinpoints the areas in which improvements need to be made for Israel’s health system to be ready both for ordinary situations as the population grows, and for emergencies.

On the eve of the coronavirus crisis, Israel’s economy was strong, but not quite as strong as might have been expected. GDP has grown, but the rate at which it is growing has been falling for a decade and, when Israel’s quickly growing population is taken into account, GDP per capita growth in Israel is lower than the average in the OECD. Both prices and inequality have fallen in Israel, but remain high in comparison to other developed countries. A major challenge in the future will be the inevitable sharp increase in the budget deficit to at least 10% in 2020, and a subsequent increase in Israel’s public debt-to-GDP ratio. Israel would be in a more fiscally responsible position now if it had stuck to the 2019 deficit target of 2.9% of GDP when the economy was doing well, instead of entering the crisis at the already large deficit of 4% of GDP.

With regard to social welfare, the coronavirus crisis caught Israel with a high proportion of people living in poverty, a social protection system that offers less than generous cash transfers, great dependence on non-state service providers, and underfunded and understaffed social services. The impact of this crisis is expected to be most severe for the most vulnerable segments of the population, who were dependent on cash transfers and social services before the pandemic hit. Large-scale unemployment in the wake of the crisis is likely to put even more strain on Israel’s social welfare system.

Already, the coronavirus crisis has had an unprecedented impact on the labor force, with more than a quarter of the labor force being either fired or sent on unpaid leave during the economic closure in the first months of the outbreak. Yet Israel entered the crisis with a relatively strong labor market characterized by a historically low unemployment rate and particularly high labor force participation among non-Haredi Jewish men and women and Haredi women. In addition, there appears to be some light at the end of the tunnel; over 300,000 workers are estimated to have returned to their places of employment as the economy opens back up. However, it is still unclear what percentage will be rehired, and it is estimated that 20% or more of the newly unemployed will not be able to return to their jobs.

Going forward we should be wary of the fact that former employees, particularly those with lower skills who are unsuccessful in attaining alternative employment, could become discouraged and exit the labor force completely. To counter this, it is important to help such workers improve their market skills by offering skill-building courses during this time – something the Israeli Employment service is indeed doing. A measure like this is particularly important in Israel where, as our research shows, the skill gaps between high-skilled and low-skilled workers are particularly large compared to other developed countries.

Like the other socioeconomic systems, Israel’s education system has experienced a serious crisis in the wake of the coronavirus outbreak. Leading up to this unprecedented situation, Israel’s education system had experienced increases in expenditures, teachers, and classrooms. There were also numerous indicators of narrowing educational gaps (though with some concerning trends when comparing performance in the Hebrew and the Arab education system schools). The sudden and unavoidable turn to distance learning during the crisis may instigate a real revolution in the system, changing the roles of digitized instruction, informal education, and teachers in how students learn.

In all of these areas, the socioeconomic situation in which the coronavirus sprung upon Israel lays the groundwork for us to understand the ways in which Israel society and economy will change  – and they will surely change – in its wake.