Yael Mevorach is an expert for macro-economics and deputy director of the influential budget department in the Israeli Ministry of Finance. We met her to discuss Israeli economy and the high costs of living…
Interview by Katharina Hoeftmann
BTL: You have been working in the Israeli Ministry of Finance for more than ten years. Which changes in particular have shaped the work of the Ministry the most in recent years?
Yael Mevorach: First of all I think we can be proud of how the Israeli economy tackled the global financial crises of 2008. Most countries suffered from negative growth and we did not. After a year and a half we were back on track, with positive growth and a very strong labour market.
BTL: What was it that Israel did differently?
YM: Our financial sector was safer – we didn’t have toxic assets in the systems and we didn’t have to bail out our banks. And another thing is that we were very responsible fiscally. In 2007 we had a balanced budget and before that we enjoyed years of growth. We had a slow increase of the size of government, which we reduced drastically before. So we were in a very strong position when the crises started.
I am happy that we focus on social issues now
BTL: What other events influenced the work of the Ministry?
YM: Definitely the social protest of 2011. They were a wake-up call for the government.
BTL: In what way?
YM: It crystallized what the people want from the government and this changed the priorities in the budget. I myself was heading the group for lowering cost of living in the Trajtenberg Committee and I am happy that social issues rather than defense issues became more important.
BTL: According to a recent report of the TAUB Center about Israel’s economic situation the cost of living in the country is still exorbitant in comparison to the OECD average. Only topped by Japan. Among other things Israel tried to fight this problem by lowering the VAT. Is that enough?
YM: We have to make our markets more competitive. Many local producers only compete on the Israeli market, this is bad for the productivity rate. In addition we have a lot of monopolies, some of them governmental, that effect the prices to the disadvantage of the consumer.
BTL: How can these existing monopolies be broken?
YM: That is a question we have been working on for years now. We are trying to find and strengthen alternatives. We privatized many governmental companies but it’s a long way to change. Imports could reduce the prices and put more pressure on local producers, but ports for example are a governmental monopoly – if they are not as efficient as they can be its a huge problem. And don’t forget that Israel is an island in terms of commercial elements. Everything has added transportation costs…
BTL: And then there is the fact that all food needs to be kosher.
YM: Exactly, more additional costs.
BTL: You mentioned the productivity – why is it so much lower in Israel compared to the OECD average?
YM: Markets that export have a higher productivity. And we have a lot of local businesses that don’t export. They operate out of competition. In the last decade we are also working very hard on a better participation on the labor market, especially by Ultra-orthodox men and Arabic Israelis. Thanks to several programs they are slowly participating more and more in the labor market.
The minorities are the main potential for growth
BTL: Most of them still work in low-income-jobs…
YM: Which is why the overall productivity is still low. But the trend is positive. If you look at our demographic development these minorities are the main potential for growth. We hope that in five years they will work in higher paying jobs like in the High-Tech-Sector, which is why the training programs for these groups are so important.
BTL: The goal always seems to be to work in High Tech, where many of Israel’s well-paid jobs are found. But a society needs teachers and garbage collectors as well. Might the focus on being a start-up-nation poses a danger for Israeli economy?
YM: Its a big challenge, especially in terms of equality. But teachers for example got a rise of 20 percent and more over the last few years. But giving higher wages is not the way to tackle this issues. We want spill-overs from High-Tech to other elements of the market.
BTL: For example?
YM: Take the navigation app Waze, the way how we can now utilize our road system and plan and optimize our time on roads is something that affects our life and increases growth. If we save ten minutes a day that’s fantastic. We need even more spill-overs like that. The education and health sector, they all can profit from developments of the High-Tech-world.
BTL: So lets talk about housing. You were working in the housing department of the Ministry of Finance for a few years – the prices for buying an apartment are skyrocketing. What is the ministry doing in order to make housing affordable?
YM: First of all we need to work against low interest rates, which is not easy. And another thing is that we need to supply more housing space. We are not catching up with the increasing demand. Whole neighborhoods need to be planed, many on land that belongs to the country. In recent years we managed to double the property that has been auctioned out.
BTL: But then they build a whole new neighborhood and the minute the apartments are ready for occupancy the prices are up by 30, 40 Percent. How can this cycle be broken?
YM: It’s safe to say that prices will not go up without any limit. But as long as the interest rates are low its harder to put an end to it. We took many steps in order to reduce the profitability for investors, e.g. through higher taxes. Another key element in the fight for reducing the housing prices is to auction off the land to the buyer that will offer the lowest cost for buying the finished apartments rather than the highest bidder.
BTL: This reduces the value of the property…
YM: And that is exactly what we want to do at this point. Additionally we have agreements with the municipalities who in the past didn’t want to build for housing but rather commercial and industrial zones, since those are more profitable – we budgeted this gap and this way push them to build more apartment buildings. All in all we have a lot of different means that are pushing from different directions in order to make housing more affordable.
BTL: In cities like Berlin and New York its forbidden to sublet apartments in Airbnb and such. Is this an option for an expensive city like Tel Aviv?
YM: The question is if we should do that because if we look at the housing sector in general thats not an issue. We would want young couples to be able to live in Tel Aviv as well but firstly we focus on them being able to buy in Hadera, Ashdod and Ashkelon. That’s where we need to start because thats where the majority of people is.
Most rented property is owned privately – thats harder to monitor
BTL: What about a more restrictive tenancy law?
YM: In Israel we have a unique situation: Most of the rented property is owned privately. That’s hard to monitor.
BTL: A law would still be an answer…
YM: What we are afraid of, is that this would raise prices. If the landlords know that they can’t raise the rent for a few years they would just do this immediately and thus increase the apartment prices heavily. Generally, it would be a regulation on a free market and this is hard to do in Israel. The government is in favor of liberal, free markets.
BTL: There is a strong and very established upper class in Israel, many successful global players who profit from our liberal, free market – shouldn’t they shoulder more responsibility?
YM: The maximum income tax is 48 Percent. The cooperate tax is 25 Percent, we tax revenues and dividends – and those are not particularly low. And most of the paid taxes come from the 9th and 10th percentile of the population. Our social security system is very progressive. But of course a socialist would say: tax the rich more. But the government of today’s Israel says: we want to tax less and give less benefits. We want a free market that works for our economy.
BTL: Thank you very much for this interview!
