The Israeli Economy

January 2012

Ministry of Finance

Main Economic Indicators

Main Economic Indicators

Strong and sustainable GDP growth

Labor market

Moderate levels of inflation

Eight years of consecutive surplus in the current account

1.6%

5.0% 4.9%

5.7%5.4%

4.2%

0.8%

4.8% 4.8%

3.2%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

GDP Growth Percentage Per Annum

*Budget Estimate was 4.0%

Source: Central Bureau of Statistics, Ministry of finance

Unemployment and Participation Rates

8.9%8.7%

9.3%

10.3%10.8%

10.3%

9.0%

6.0%5.5% 5.6%

7.6%

6.6%

8.4%

7.3%

6.1%

4%

6%

8%

10%

12%

52%

53%

54%

55%

56%

57%

58%

59%

60%Participation rate

(right axis)

Unemployment rate(left axis)

Source: CBS

57.3%

0

2

4

6

8

10

6Source: Bank of Israel

Year-End Inflation Rate Central Bank’s Key Interest Rate

Today = 2.75%

Inflation is Under Control

Balance of Payments - The Current AccountUS$ Billions & As Percent of GDP

-0.7%-0.6%

3.4%

5.2%

2.4%1.1%

3.5%3.0%

0.4%1.6%1.2%

-1.0%

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Percent of GDP

\

Source: CBS. * First three quarters annualized

Fiscal Policy

Expenditure growth is derived from two elements: Distance from debt target Permanent long term growth

The New Fiscal Rule

Debt/GDP ratio Expenditure growth rate =60%

*Average Growth Rate of 10 Years

200920102011201220132014 onwards

6.0%5.5%3.0%2.0%1.5%1.0%

No change in the deficit ceiling

One always functions as the effective limitation

42.342.643.043.043.6

44.745.3

47.3

50.150.8

30

35

40

45

50

55

60

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

General Government Expenditure As a percentage of the GDP

Source: CBS, The Ministry of Finance

General Government Expenditure As a percentage of the GDP, International comparison 2010

5957

5553 53 53

52 51 51 51 50 50 50 5048

46 46 45 45 44 4443 43 43 43

41 40 40

37 3634

31

25

30

35

40

45

50

55

60

65

*Weighted average; Source: OECD

Tax Burden of the General Government2009 % of GDP

Source: OECD, Ministry of Finance

Public DebtAs a percentage of the GDP

77.8%

99.2%96.6% 97.4%

93.8%

84.3%

77.1%79.3%

76.3%74.0%

60%

70%

80%

90%

100%

110%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011*

* Estimated Figures for 2011

Source: The Ministry of Finance

0

20

40

60

80

100

120

140

160

180

200 20102007

Public Debt Increase Between the years 2007-2010

As a Percentage of the GDP , International comparison

Maastricht: 60% Debt

Source: OECD Outlook 90, Israel 2010 - MOF

Central Government's Budget Deficit As a Percentage of the GDP, actual and according to the scheme

* According to the Deficit Reduction and Budgetary Expenditure Limitation law 1992Source: CBS, the Ministry of Finance

3.9

3.0

3.4

3.0 2.9

1.6

6.0

5.5

3.0

2.0

1.0

2.2

1.5

4.0

0.9

1.8

3.5

5.2

3.5 3.43.3

3.7

5.2

0.00

1

2

3

4

5

6

7

2002

2003

2004

2005

2006

2007

2008**

2009

2010

2011

2012

*2013

*2014

Budget law

Actual

** Fiscal rule limitation was 3% in 2008

Latest Forecast

Key Economic Policies

Fiscal Responsibility – According to the Fiscal Rule

Encouraging Growth by:

Structural Reforms - Advancing Competitiveness

Active Labor Market Policies

Reducing Bureaucracy

Automatic Stabilizers

Committee for Social and Economic Reform(Trachtenberg Committee)

Tax policy

Cost of living and competitive markets

Priority changes within the expenditure limitation

Housing and real-estate market

Tax policyLegislation has been completed

Cancelling the direct tax reduction scheme (Individual and Corporate)

Raising maximum marginal tax from 44% to 48%

Lowering income tax for incomes between 8-14 thousand NIS a month

(from 23% to 21%)

Raising corporate tax from 23% to 25%

Raising capital gains tax from 20% to 25%

VAT will remain 16%

Reducing duty free cigarette allowance

Introducing Tax allowance for fathers

Cancelling the rise in fuel taxes

Increasing negative income tax for women