NCPA - National Center for Policy Analysis

Israeli Government Consumes 55 Percent of Output

March 29, 2004

With the attention on Israel being focused primarily on the Palestinian issue, what has almost gone unnoticed is the fact that the country's welfare state is also on the verge of a dramatic overhaul. The movement for renewing economic freedom, led by Ehud Rassabi and former Prime Minister Benjamin Netanyahu, has already drawn comparisons with the leadership of President Ronald Reagan.

Israel, once labeled as the "last remaining socialist state in Eastern Europe," has been ripe for economic reform:

  • Coming off a long and painful economic recession, Israel has still some 10 percent of its workforce unemployed.
  • Government expenditures reach 55 percent of gross domestic product GDP -- by comparison, U.S. federal and state government expenditures combined are less than 33 percent.

Working with Israel's coalition government, Netanyahu has implemented a number of tough, but necessary reforms. Government expenditures, welfare expenditures, and public-sector jobs and salaries have been cut. Spending increases have been constrained to 1 percent annually for the next five years. The top marginal tax rate has been reduced to less than 50 percent. And a privatization program has been established to break the government's stranglehold on land ownership, water, energy, telecommunications and natural resources.

Despite these successes, Israel's powerful labor organizations continue to jeopardize further reform. Thus far, labor has been effective at forcing concessions from Rassabi and Netanyahu through threats of strike action.

Source: Kimberley A. Strassel, "Israel Gets a Taste of Friedman", Wall Street Journal, March 1, 2004.

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