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- GDP (PPP):
- $235.2 billion
- 4.7% growth
- 4.0% 5-year compound annual growth
- $30,975 per capita
- Inflation (CPI):
- FDI Inflow:
Israel’s economic freedom score is 66.9, making its economy the 51st freest in the 2013 Index. Its overall score has decreased by 0.9 point, with declines in six of the 10 economic freedoms including fiscal freedom and freedom from corruption. Israel is ranked 6th out of 15 countries in the Middle East/North Africa region.
The relatively sound judicial framework that sustains the rule of law and provides consistent protection for property rights has contributed to Israel’s stability and long-term competitiveness. Openness to global commerce supports productivity growth. With an increasingly diversified productive base and ongoing structural reforms, Israel’s growth has been about 5 percent annually over the past five years.
Respect for the principle of limited government, however, has weakened, entailing new risks for Israel’s economy. Fiscal consolidation and better management of public finance are needed to curb a growing debt burden caused by growing government spending. In late 2011, the government adopted tax rate changes that ended its previous multi-year tax cut plan. The changes have raised the corporate tax rate to 25 percent and the top individual income tax rate to 48 percent.
Israel gained independence in 1948, and its vibrant democracy remains unique in the region. Prime Minister Benjamin Netanyahu leads a right-of-center coalition government formed after the February 2009 elections and strengthened by the addition of the centrist Kadima Party in May 2012. Although endowed with few natural resources, Israel has developed agriculture, industry, and a dynamic high-tech sector that attracts considerable foreign investment because of reliable property rights. The discovery of large offshore natural gas deposits has improved Israel’s energy security and balance of payments prospects. Exports of goods and services generate about 40 percent of GDP. Despite the 2006 war against Hezbollah in Lebanon, the December 2008 war against Hamas in Gaza, the constant threat of terrorism, and a state-dominated economy, growth remains on track.
The rule of law is sustained by a modern legal framework based on British common law. Protections for property rights and contracts are enforced effectively. The court system is independent, and commercial laws are applied consistently. Bribery and other forms of corruption are illegal. Relatively effective anti-corruption measures help to strengthen the foundations of economic freedom.
The top income tax rate has been raised to 48 percent, and the corporate tax rate has been increased to 25 percent. Other taxes include a value-added tax (VAT) and a capital gains tax. The overall tax burden equals 32.4 percent of total domestic income. Government spending is equal to 45 percent of GDP. The government has been running a budget deficit, with public debt corresponding to over 70 percent of GDP.
The relatively efficient regulatory framework supports business formation and innovation. With no minimum capital required, launching a business takes only five procedures on average. However, obtaining necessary permits involves about 20 procedures and over 200 days. The labor market needs more flexibility to accommodate rapid economic transformation. Inflation is moderate, but inflationary pressures are building.
The trade-weighted average tariff rate is 3.5 percent, and non-tariff barriers add to the cost of trade. The investment regime is modern and efficient, supporting vibrant levels of foreign investment. Financial institutions offer a wide range of services, and credit is readily available on market terms. Capital markets have been evolving as part of Israel’s effort to reinvent itself as a regional financial hub.