Erik Frohm
OECD
OECD Economic Surveys: Israel 2025
Abstract
Israel has among the highest comparative price levels in the OECD, reducing welfare and spurring social tensions. A combination of geographical factors, trade barriers and stringent product market regulation have resulted in low competitive pressures, contributing to high prices of essential goods and services. Recent import reforms are expected to increase access to the Israeli market by enhancing border procedures and limiting technical barriers to trade. Continuing such trade liberalisation efforts alongside lower tariffs can help reduce import prices. Easing market entry and strengthening competitive pressures are essential to durably lower prices, strengthen productivity and increase incomes. Streamlining building and land regulations alongside changes to the taxation of properties could help increase the supply of housing, thereby reducing high housing costs.
Over the past decades, Israel has significantly improved its living standards. GDP has more than doubled since 2000, bringing it closer to the OECD average in 2022. Unemployment is low, and employment rates have rapidly improved. Inflation has been moderate, averaging 1.7% per year since the early 2000s, yet the price level of goods and services remains high in an international comparison. According to the OECD Purchasing Power Parity statistics, Israel's comparative price level is among the five highest in the OECD (Figure 4.1, panel A). Prices are comparatively higher than for the OECD median country for several essential goods and services, and among the highest in the OECD for food and housing (Figure 4.1, panel B). While international price comparisons are complex due to limited data collection, especially at more granular levels (see Box 4.1), methodological issues may not fully explain the relatively high price levels observed in Israel.
Notes: Comparative Price Levels (CPLs) are defined as the ratios of PPPs for private final consumption expenditure to USD exchange rates. They provide measures of differences in price levels among countries.
Sources: OECD Annual Purchasing Power Parities and exchange rates database; and OECD calculations.
Purchasing Power Parities (PPPs) are indicators that compare the relative value of currencies by measuring the amount needed to purchase a common basket of goods and services in different countries. While intuitive in theory and useful in practice, defining these common baskets, and collecting and comparing the necessary data, is challenging.
The OECD-Eurostat PPP-programme is part of the International Comparison Program (ICP), comprising more than 180 countries. In all, the OECD-Eurostat programme collects data under 189 basic headings, significantly less than most national consumer price indices (CPIs). In particular, the PPPs are constructed to measure price level differences across countries at a given point in time, and any price-level comparisons over time should be done with caution.
Overall, when measuring the price level domestically over time to asses the rate of inflation, it is more suitable to use the CPI. When comparing price-levels across countries in a given point in time, the PPP should be used. Although the PPPs are considered reliable at an aggregate level, comparisons for detailed sub-categories or products should be made with substantial care and consideration.
Source: (European Union/OECD, 2024[1]).
The high cost of living is a key challenge in Israel, leading to frequent protests and demands for solutions, notably the “tent” and “stroller” protests of 2011, and subsequent protests in the 2010s and 2020s. A survey conducted by the Israel Democracy Institute in May 2023, prior to the terrorist attacks on October 7, found that roughly one-third of respondents (the largest share) identified the cost of living as the most important policy concern (IDI, 2023[2]).
High prices are not necessarily evidence of economic distortions requiring policy intervention. Generally, countries with higher incomes have higher overall price levels. According to Balassa-Samuelson effects, this can be explained by productivity growth differentials between tradable and non-tradable sectors. Higher productivity in tradable sectors (like the high-tech sector in Israel) leads to higher real wages, which in turn drives up prices in non-tradable sectors. Economic welfare depends on the price of goods and services relative to incomes. However, Israel's comparative price level is also higher than expected based on its GDP per capita (Figure 4.2, panel A).
Other measures of households’ purchasing power are the average or median wages per full-time equivalents, deflated with the comparative price level for private consumption. Median wages per person or per hour are lower than the OECD average (Figure 4,2, panel B). Moreover, the share of full-time workers earning less than two-thirds of the gross median earnings of all full-time workers is among the highest in the OECD (OECD, 2023[3]). As such, high prices particularly impact lower-income households, who spend a substantial portion of their income on necessities, exacerbating inequalities. For example, households in the top fifth income bracket spend around two-fifths of their net income on essentials (housing, food and transport), whereas households in the bottom fifth spend almost all their net income on these items (Figure 4.2, panel C).
Several structural factors contribute to Israel's high prices. Challenging relations with some neighbouring countries limit trade and supply-chain integration, while creating geopolitical and economic uncertainties. Administrative red tape and planning obstacles reduce the supply of housing, a major household expenditure. Trade barriers and weak competitive pressures result in higher costs for companies and consumers. Limited competition and stringent product market regulations in many sectors hinders productivity gains that could translate into higher real wages and greater purchasing power. The economy is dual, with a highly productive high-tech sector alongside traditional low-productivity sectors employing most of the workforce (OECD, 2023[3]). To boost overall productivity and real wages, competitive pressures must increase and barriers to expansion be lifted.
Notes: In Panel A, Comparative Price Levels (CPLs) are defined as the ratios of PPPs for private final consumption expenditure to USD exchange rates. They provide measures of differences in price levels among countries. The comparative price levels are regressed on GDP per capita in 2022 for OECD countries. The bars show the deviation from the trend-line. Larger positive (negative) deviation indicates that prices are higher (lower) than what would be expected on the basis of GDP per capita.
Sources: OECD Annual Purchasing Power Parities and exchange rates database; OECD Annual National Accounts database; Israel Central Bureau of Statistics; and OECD calculations.
In real terms, Israeli exports have more than doubled since the turn of the century. Export volumes increased by 123% since 2000 and import volumes by 111%, broadly in line with developments in GDP (which increased by 124% over the same period). Israel's trade openness, defined as the trade-to-GDP ratio, is lower than the OECD median (Figure 4.3 Panel A). Despite improvements, barriers to trade and investment remain, including tariffs, cumbersome administrative processes and red tape that increase import prices and diminish competitive pressures. Israel has pursed reforms in product markets over the past decade, yet scores poorly on the OECD's Product Market Regulation (PMR) indicator, pointing to substantial room for improvement to spur domestic competition (Figure 4.3 Panel B). Israel also lags behind many OECD countries in other rankings, such as the Fraser Institute Economic Freedom Index and the IMD World Competitiveness Ranking.
Addressing the high cost of living requires multiple approaches, including raising productivity to increase household disposable incomes, lowering import costs for companies, and fostering competition to pass on cost savings to consumers. Improving the supply of housing is crucial in reducing the largest expenditure for most households. A comprehensive policy package should focus on lowering trade barriers by implementing recent import reforms to enhance competition and reduce costs, streamlining regulations to facilitate market entry, and improve planning regulations to boost housing supply. These measures will help foster a more competitive and dynamic economy.
The next section will analyse policies to reduce trade barriers and lower import costs. The following section will discuss ways to reduce administrative burdens and increase competition. The final section will focus on policies to increase housing supply.
Notes: In Panel B, the Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable.
Sources: OECD Economic Outlook: Statistics and Projections database; OECD Product Market Regulation database; and OECD calculations.
Israel has advanced in integrating into international trade and investment markets, in particular in the innovative high-tech sector. Exports of high-tech products accounted for 53% of total exports in 2023. The domestic value added from IT services in exports is among the highest in the OECD, highlighting the crucial role of high-skilled services in the Israeli economy. Israel’s primary trading partners are EU member states, the United States, and Asian countries, notably China (Figure 4.4). Despite high trade exposure in certain sectors and substantial foreign direct investment, in particular in the high-tech industry (see Chapter 2 in this Survey), overall openness to trade and participation in global supply chains remains lower than in the average OECD country (Figure 4.5, panel A) and trade costs are comparably high (Figure 4.5, panel B).
Challenging relations with some neighbouring countries, geopolitical tensions and distance to key trading partners contribute to the low trade shares. Indeed, model-based estimates suggest that Israel’s trade with other countries in the Middle East could be significantly higher, based on conventional gravity determinants (see Box 4.2). This considerable potential is confirmed by the surge in trade flows with signatory countries of the Abraham Accords following their signing in 2020 (see Box 4.3).
Trade in goods shares, %, 2023
Sources: Israel Ministry of Economy, Industry and Trade.
Israel has been been on a path of trade and agricultural liberalisation in the past decades and efforts are continuing (OECD, 2024[4]). The authorities have reduced central planning of agricultural industries, and changed the way production quotas, price controls and import protection are implemented. Major reforms in the agricultural sector began in the early 1990s to limit the role of the state in agricultural markets. Trade liberalisation efforts continued in the 2000s, with a focus on competitiveness and some efforts to limit interventions in the dairy and beef sectors, including by lowering tariffs. Free trade agreements have also been pursued to expand export markets and to increase import diversification. Since 2021, the government has renewed its impetus to boost imports by harmonising standards and simplifying customs processes to lower goods prices (OECD, 2024[4]).
Notes: In Panel B, the effective trade costs are estimates of the costs involved with international trade relative to domestic activity from ESCAP-World Bank, averaged across destination economies in 2021.
Sources: OECD Economic Outlook: Statistics and Projections database; OECD FDI Statistics database; OECD TiVA database; ESCAP; and OECD calculations.
Maintaining efforts to improve geopolitical relations and lowering barriers to trade through the implementation of recent import reforms would yield multiple benefits for the Israeli economy. It would lower the cost of importing goods and services further, increase competitive pressures, enhance productivity, and support wages and real incomes (Arkolakis, Costinot and Rodríguez-Clare, 2012[5]). Foreign competition would make markets more efficient, diversify imports, and lower prices (Bernard, Jensen and Schott, 2006[6]; Broda and Weinstein, 2006[7]). The gains from trade would likely benefit the poorest part of the population the most, as they typically spend more on imported goods (Fajgelbaum and Khandelwal, 2016[8]). The pro-competitive effects of reducing trade costs would likely drive out the least productive firms while encouraging more efficient ones to enter the market (Melitz, 2003[9]). To maximise the benefits of trade, it is essential to allow the dynamic reallocation of economic activity to ensure productivity gains are realised.
Trade costs can be further reduced through various measures. These include continuing to establish new free trade agreements, enhance existing ones, cut tariffs on agricultural products, further improve customs procedures, and reduce technical barriers to trade. Additionally, removing obstacles to foreign investment and services would increase competition, reduce import costs, boost productivity and lower the cost of living. Furthermore, improving the overall business environment, strengthening institutional quality and reducing corruption can serve as a comparative advantage in trade.
The structural gravity framework is the main econometric tool to evaluate the effects of bilateral trade barriers on international commerce. The model, which uses a partial-equilibrium framework, relates trade flows between country pairs to total expenditures, output and total trade costs. By using data for 193 exporters and importers over 1996-2020 from CEPII’s Gravity-dataset (Conte, Cotterlaz and Mayer, 2022[10]), this box leverages a standard empirical gravity model (Head and Mayer, 2014[11]; Yotov, Piermartini and Larch, 2016[12]) to examine Israel’s trade with countries in different regions of the world. Bilateral trade costs are approximated by standard gravity variables (free trade agreement membership, the logarithm of geographical distance, as well as dummies for border contiguity, common colonial ties, the sharing of a language and religious proximity). Exporter-year and importer-year fixed effects control for multilateral resistance terms, capturing the relative ease or difficulty to trade between a given pair of countries in the context of their trade relationships with all other countries, as well as expenditures and output.
Figure 4.6 shows the ratio of actual to predicted trade flows, on average across years and countries in the sample, for seven geographical regions. If the ratio is equal to one, the model predicts trade flows perfectly and if the ratio is higher (lower) than one, actual trade flows are higher (lower) than predicted. The empirical model reasonably explains Israeli and OECD trade flows with most regions in the world. An exception is Israel’s trade with countries in the Middle East, where trade flows are substantially lower than predicted by the model. One key reason is that challenging relations and geopolitical tensions that limit or prevent trade are not fully captured by the explanatory variables in the model. Based on conventional gravity determinants, there could be significant potential for trade with neighbouring countries as geopolitical tensions ease and relations improve. However, these estimates do not consider trade data after 2020, that saw the signing of the Abraham Accords and an expansion of trade with signatory countries (see Box 4.3).
Ratio of actual trade flows to predicted trade flows, in logarithms.
Sources: CEPII and OECD calculations.
The Abraham Accords were signed in 2020, enabling diplomatic as well as other relations between Israel and signatory countries (Bahrain, Morroco, United Arab Emirates (UAE) and Sudan).
Participants in the Accords, as well as Saudi Arabia, began allowing Israeli airlines to use their airspace, enabling direct flights between the countries and shortening travelling times significantly. Moreover, the signatories commited to cooperation in tourism, security, communications, technology, energy, health, culture, and the environment. Travel and entry between Israel and the countries were made significantly easier. The tourism agreement includes provisions for family and economic tourism, as well as the creation of a joint tourism forum. The UAE also repealed a 1972 law that enforced an economic boycott of Israel and related sanctions. In 2023, a free trade agreement between Israel and the UAE came into force, further deepening relations.
Since the signing of the Accords, trade in goods between Israel and the signatory countries has surged, in particular with the UAE but also Morocco and Bahrain (see Figure 4.7). Due to threats from the Houthis in the Red Sea, land routes through Israel have become a less risky corridor for trade between Europe and Asia. As a result, the volume of cargo and goods passing through the Sheikh Hussein crossing (Israel-Jordan) and the Nitzana crossing (Israel-Egypt) has been increasing steadily. Even after the October 7 terrorist attacks, trade has remained resilient (AAPI, 2024[13]).
Trade in goods by partner country, millions USD
Source: Ministry of Economy, Industry and Trade of Israel.
Signing new Free Trade Agreements (FTAs) and updating existing ones can substantially reduce trade costs and boost trade volumes (Baier and Bergstrand, 2007[14]; Bergstrand, Larch and Yotov, 2015[15]; Franco‐Bedoya and Frohm, 2022[16]; Nagengast, Rios-Avila and Yotov, 2024[17]). Israel currently maintains 16 FTAs with 48 countries and economic blocs, including the European Union, the European Free Trade Association, the United States, and Mercosur. These agreements have generally led to significant increases in trade (Baier, Yotov and Zylkin, 2019[18]). Nonetheless, Israel's goods trade within its FTAs remains relatively low (Figure 4.8). Goods imports with FTA countries constitutes 53% of total goods imports whereas exports within FTAs are higher, accounting for 70% of total goods exports. The relatively low share of trade in FTAs indicates potential for continuing to negotiate additional FTAs and deepening existing agreements.
The European Union is Israel’s largest trading partner, governed by the EU-Israel Association Agreement in effect since June 2000. This agreement includes provisions on rules of origin, duties, services, industrial trades, cooperation in tourism, and transport, and prohibits customs duties on imports and exports between Israel and the EU. Agricultural trade was further liberalised in January 2010. Additionally, the Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA) in pharmaceuticals provides mutual recognition of pharmaceutical certification, removing barriers and facilitating trade. Furthermore, the EU’s introduction of a carbon border adjustment mechanism could reduce the price competitiveness of Israeli exports to the EU unless Israel enacts more stringent environmental policies.
Israel’s FTA with the United States was signed in 1985, eliminating duties on manufactured and some agricultural goods by 1995. However, the agreement allows both countries to protect sensitive agricultural sub-sectors with non-tariff barriers, such as import bans, quotas, and fees. The FTA contains detailed rules for merchandise trade, including investment and intellectual property provisions. The agreement also expresses an intent to eliminate barriers to trade in services like tourism, communications, and professional services, and a binding commitment to remove restrictions on government procurement.
Share of trade in goods with FTA-countries, %, 2022
Notes: The figure shows the share of goods trade within FTAs as a share of total goods trade, imports in goods and exports in goods respectively. The figures for Israel are from 2023.
Sources: BACI and Gravity database from CEPII and the Ministry of Economy, Industry and Trade in Israel.
Israel and the United States concluded an additional temporary agreement on agricultural products in 1996, updated in 2004. Since 2009, this agreement has been extended annually through one-year extensions. Under the agreement, the United States grants Israel duty-free export access to 90% of agricultural tariff lines, while Israel reciprocates with duty-free access to 72% of agricultural tariff lines. Enhancing the share of duty-free imports from one of Israel’s largest trading partners should be prioritised. This can be achieved by integrating the agreement into the Israel-United States FTA to solidify it.
The European Free Trade Association (EFTA) States (Iceland, Lichtenstein, Norway and Switzerland) signed an FTA with Israel in September 1992, which came into force in January 1993. Since then, the agreements have been modernised and expanded, notably through bilateral agricultural agreements effective from 2021. This FTA covers trade in industrial products as well as fish and marine products, complemented by bilateral agricultural agreements with individual EFTA States, thereby creating a comprehensive free trade area.
Israel was the first country outside of the Americas to establish free trade with Mercosur. Israel's strong exports to Brazil materialised the trade potential in areas such as agro-tech. In efforts to strengthen import diversification and expand export markets, several new trade agreements have been negotiated and come into force in recent years. Since 2020, trade agreements have been signed and come into effect with Panama, Colombia, the Ukraine, the United Kingdom, South Korea, the United Arab Emirates (following the signing of the Abraham Accords), Guatemala and Vietnam. Moreover, Israel is currently negotiating revisions to its FTAs with the United Kingdom and is also pursuing new FTAs with several countries, including Costa Rica, Bahrain, China, and India. Continuing efforts to liberalise trade by extending existing agreements and finalising new ones is crucial for Israel's trade policy. The adoption of further preferential or free trade agreements that also include agriculture would continue to help diversify food import sources and increase export destinations.
Over the past decades, import duties and tariffs have been reduced unilaterally across a wide range of products, with expected positive effects on prices and import volumes. For example, canned tuna duties were gradually reduced in Israel between 2013 and 2016 - from 27% to 12%. An assessment by the Israeli Competition Authority showed that consumer prices were substantially reduced and yielded NIS 38 million (USD 10 million) decrease in costs for households, compared to the NIS 11 million (USD 3 million) decrease in tariff revenues (Competition Authority, 2022[19]). In other cases, tariff decreases have not coincided with a reduction in prices (MoA, 2024[20]). Although a tariff reduction on specific goods or commodities may appear to have limited impacts on prices in the shorter term, their effects are likely to fully materialise over the medium to long term (Anderson and Yotov, 2023[21]).
While overall tariffs have progressively decreased, many agricultural goods still face significantly higher tariffs than the OECD average, including animal products (such as poultry and sheep meat), various agricultural goods (dairy products and eggs), and certain fruits and vegetables (Figure 4.9). Trade barriers and price interventions have resulted in Israeli agriculture producer price levels being 12% higher than international prices between 2021 and 2023 (OECD, 2024[4]).
Half of agricultural imports entered Israel duty-free, primarily through Most Favoured Nation (MFN) access and preferential agreements (notably with the European Union and the United States). However, the Israeli tariff system remains intricate, involving specific, compound, or mixed duties (OECD, 2024[4]). In 2022, approximately one in five imported agricultural products were subjected to non-ad valorem rates, compared to around 3% for all goods. Except for beef, poultry, mutton, and their products, there is no legal requirement for imported food and agricultural products to be Kosher. However, products without Kosher certification command a much smaller market share (further details can be found in the next section of this Chapter) likely due to consumer preferences.
In 2022, the government introduced tariff reductions for several varieties of fruit, vegetables, and agricultural inputs to mitigate shortages and lower prices. Tariffs were abolished with immediate effect for specific vegetables and fruits (e.g. garlic, pineapple, avocado, mango) and agricultural inputs (plant propagation material, fertilisers and pesticides). For seven other selected fruit varieties and vegetables, duties were scheduled to decrease gradually over a five-year period to 10% of their January 2022 levels (OECD, 2024[4]). However, the planned tariff cuts were revoked in December 2023, due to concerns about domestic production capacity and divisions regarding support to farmers, with no resumption plans. Reinstating the planned tariff reductions would further liberalise the market for vegetables and fruits, thereby increasing supply and reducing prices.
Average effectively applied tariffs, %, 2022
Notes: Effectively applied tariff is defined as the lowest available tariff. If a preferential tariff exists, it will be used as the effectively applied tariff.
Source: World Bank, WITS-TRAINS database.
Tariff protection and non-tariffs barriers shields Israeli agricultural producers from competition. One rationale for protecting the agricultural sector from foreign competition is the perceived necessity to secure domestic production of essential goods. Although such concerns may be persuasive, trade protection diminishes valuable competitive pressures, raising consumer prices and hampering productivity growth in the sector. Recent studies emphasise that lower trade integration reduces welfare (Cerdeiro et al., 2021[22]; Góes and Bekkers, 2022[23]; Attinasi, Boeckelmann and Meunier, 2023[24]). Furthermore, studies underscore that countries have more volatile GDP when trade is more restricted and conversely less volatile GDP when trade is more open (Arriola et al., 2020[25]; IMF, 2022[26]). This is because more open trade makes markets “thicker”, by expanding the number of possible suppliers and buyers, helping companies to deal with supply-related risks if they occur (IMF, 2022[26]). Trade in agricultural products can also help ensure economic security in times of extreme weather events (Adenäuer, Frezal and Chatzopoulos, 2023[27]).
Efficiency gains in agriculture are vital, especially given the limited land in Israel, which has highly valued alternative uses such as housing construction or energy production. Despite innovation, the overall productivity of Israeli agriculture, as measured by total factor productivity (TFP), declined between 2011 and 2020 (OECD, 2023[28]).
By 2050, the Israeli population is projected to increase by 2 million (UN, 2024[29]). Failing to boost the supply of agricultural products will not only drive prices higher but may also result in shortages, as has occurred with butter in 2019 and 2020 and milk products in 2022 and 2023. Dairy products are heavily protected by tariffs in Israel, with milk facing about 40% tariffs, and are subject to centralised planning and government-approved quotas (see the next section). As milk prices are regulated and input costs rise, dairy farmers become reluctant to increase output, preferring to shift their sales to dairy products not subject to government control, leading to shortages of price-controlled milk.
To alleviate these shortages, the government approved temporary dairy tariff cuts in July 2023 to encourage cheaper imports, which were extended until January 2024 due to the October 7 terrorist attacks. These cuts should be made permanent to increase the supply of dairy products and reduce prices. Overall, agricultural tariffs should be reduced, and the tariff system should be simplified by eliminating non-ad valorem tariffs. Support to farmers could be shifted towards targeted direct payments in lieu of tariff protection, if needed. Such support should incentivise farmers to apply more sustainable practices and invest in productivity-enhancing equipment (OECD, 2024[4]).
4.5.1. Improving trade facilitation
Cumbersome regulations and difficult border procedures are impediments to goods trade and raise import costs. To address such obstacles globally, the World Trade Organisation (WTO) introduced a Trade Facilitation Agreement (TFA) in 2013 that came in force in 2017. The OECD’s Trade Facilitation Indicator (TFI) captures countries’ progress on the TFA and its implementation.
Between 2012-2024, Israel improved its value on the TFI by roughly 0.1 index points per new wave. Several reforms have been undertaken over the past decade, further facilitating trade. Notably, the "Cornflakes Law," enacted in 2016, aimed to ease the importation of dry goods such as rice, crackers, and cereals (hence its nickname). This legislation authorised importers to declare items without prior regulatory or foreign manufacturer approvals. This streamlined process enabled importers without exclusive agreements with foreign food manufacturers to source goods from alternate suppliers. The legislation also facilitated swift customs clearance (within one day) upon submission of accurate and pertinent documentation.
Since the last collection of the TFI in 2022, changes in several areas covered by the indicator have been undertaken. In particular, the "No stopping at the Port" reform entered into force in July 2024. With the changes, thousands of products imported to Israel that previously had to comply with mandatory standards checks are no longer stopped at the ports for inspections, or for the issuing of approval certificates. Instead, the Israeli authorities use market monitoring based on risk assessment, like the approach used in other developed markets. Additional reforms entered into force in January 2025, further easing border procedures alongside an alignment with international technical standards for consumer goods, food and cosmetics.
Notes: “Trade facilitation” refers to a specific set of measures that streamline and simplify the technical and legal procedures for products entering or leaving a country to be traded internationally. Trade facilitation covers the full spectrum of border procedures, from the electronic exchange of data about a shipment, to the simplification and harmonisation of trade documents, to the possibility to appeal administrative decisions by border agencies.
Sources: OECD Trade Facilitation Indicators (TFIs) database.
Information accessibility has improved, appeals procedures and document formalities become more streamlined and collaboration among border agencies have been enhanced (Figure 4.10, panel B). Achieving even better border cooperation with more neighbouring countries may pose challenges in the current environment, yet it remains a priority.
This box draws on findings from (Frohm, Forthcoming[30]) to quantify potential reductions in trade costs achievable through enhanced trade facilitation measures in Israel. Using illustrative scenarios, this Box assesses the trade cost reduction that could be implied by import reforms that altered Israel’s Trade Facilitation Indicator (TFI) between 2022-2024, and the additional gains that could be had from improving towards that of top-performing OECD countries.
The estimates suggest substantial reductions in distance-related trade costs. The change in the trade facilitation-related measures between 2022 and 2024 is estimated to have reduced distance related trade costs by 9% (Figure 4.11). Improving the Israeli TFI towards the OECD top 5 performers, excluding external border cooperation, has the potential to lower trade costs by an additional 28 percentage points. Also improving external border cooperation towards the OECD top 5 performers would slash trade costs by an additional 4 percentage points.
These illustrative scenarios underscore the pivotal role of Israeli customs procedures in either facilitating or hindering trade. Unlike traditional trade policies such as tariffs, which often encounter political contention, enhancing administrative processes through improved trade facilitation measures may encounter fewer divisions. Streamlined customs procedures that are straightforward to navigate can minimise distance-related trade costs and enable Israel to realise the full benefits of international trade.
Estimated trade cost reduction, %
Notes. (1) represents a simulated change in the TFI between 2022-2024. (2) would be the additional impact of improving the TFI towards that of top 5 OECD performers. (3) is the estimated additional effect from improving external border cooperation towards the OECD top 5 performer.
Source: Frohm (Forthcoming[30]).
While both small and large companies typically benefit from an improved trade facilitation environment, smaller enterprises tend to experience greater advantages (López González and Sorescu, 2019[31]; Fontagné, Orefice and Piermartini, 2020[32]). Enhancing trade facilitation can thus facilitate further internationalisation of SMEs, while streamlining border procedures would reduce costs for businesses and stimulate trade. The changes in Israel’s TFI from 2022 to 2024 are estimated to have reduced distance related trade costs by around 9%. If Israel would further improve its TFI towards the OECD best five performers, across all domains except external border cooperation, its distance-related trade costs could decrease by 37% in total (see (Frohm, Forthcoming[30]) and Box 4.4).
To streamline border procedures further, additional support for companies in utilising advance rulings systems, particularly SMEs, could prove beneficial. Several OECD countries like the United States, Canada, and Japan as well as the European Union utilise advanced rulings as part of their customs processes. Within the EU, member states offer binding decisions for up to three years, enhancing trade predictability for importers across the region. The systems help streamline cross-border trade by providing certainty and reducing potential delays or disputes at borders (European Commission, 2024[33]). Extending the validity period of advance rulings and expanding the coverage of the Authorised Operator programme to encompass more companies and SMEs would ease imports.
4.5.2. Reducing transactions costs by addressing technical barriers to trade
Israel imposes several technical barriers on imports. Regulatory standards and labelling requirements often differ from those of its major trading partners and are specific to the Israeli market (WITS, 2016[34]). A higher share of respondents in the World Economic Forum’s Executive Opinion Survey responds that non-tariff barriers limit the ability of imports to compete in the domestic market than in most other OECD economies (Figure 4.12). Due to its relatively small market size, technical divergences diminish incentives for potential exporters to trade with Israel, as they increase costs associated with adapting product descriptions and content labelling. Such barriers restrict market entry, suppress trade volumes, and elevate prices (Fontagné et al., 2015[35]).
Prevalence of non-tariff barriers indicator, from 0 to 7 (least impeding), 2019
Notes: The Prevalence of non-tariff barriers indicator is built on information collected through the World Economic Forum Executive Opinion Survey, more specifically on the following question: “In your country, to what extent do non-tariff barriers (e.g., health and product standards, technical and labelling requirements, etc.) limit the ability of imported goods to compete in the domestic market?“ and on the following possible range of answers: from 1 = “strongly limit” to 7 = “do not limit at all”.
Source: World Economic Forum Global Competitiveness Indicators (WEF-GCI).
The authorities have made significant strides in addressing technical barriers to trade. The import reform of 2022 marked a shift in standards implementation, moving towards declaration-based processes rather than border inspections for various products (children’s products, electronic products, and eyeglasses), while simultaneously enhancing market enforcement. Previously, all products required approval from relevant regulators prior to release, whereas the reform enabled certain products to enter without prior regulatory clearance. For food and cosmetics, the import reform in 2022 expanded the number of products available for a declaration-based track, instead of inspected, and was implemented in 2023, with a significant reduction in bureaucratic burden and time savings (MoEI, 2022[36]). The legislation adopted EU regulations on chemical and biological pollutants, pesticide residues and mercury compound residues, with exemptions for certain fresh goods, fruit and vegetables. Building on this success, the import reform of 2024 expanded the range of non-sensitive products eligible for declaration-based processing. The import reforms are welcome and will reduce barriers to trade, ease importing of non-food and food products, reduce red tape and help reduce import prices.
Additionally, the "What is good for Europe is good for Israel" reform approved by the Knesset in July 2024 and in force since January 2025 seeks to align Israeli regulatory requirements with those of the EU for multiple product categories (roughly 90% of consumer products, foods and cosmetics). This initiative entails that products deemed safe for consumption or use in the EU would not require separate testing in Israel if importers can demonstrate their legal market status within the EU. Moreover, the legislation aims to encourage parallel imports to compete with importers with exclusive arrangements. A parallel import is a non-counterfeit product imported from another country without the permission of the intellectual property owner. For example, the European Union generally allows parallel imports under the principle of "exhaustion of rights," meaning once a product is sold within the EU by the trademark owner or with their consent, it can be freely resold within the EU. Other OECD countries, such as Australia, New Zealand and South Korea, also treat parallel imports as a means of promoting competition and consumer choice.
The Israeli government estimates that full implementation of the reform can generate savings of NIS 6 000 per year (USD 1 600) for an average household. Implementation of the new legislation is planned for January 2025 and the reform represents a significant step towards reducing bureaucratic hurdles in trade and significantly facilitating imports from Israel’s primary trading partner. Maximising the inclusion of products under this reform and minimising exemptions is crucial to heightening competitive pressures and lowering import prices. The reform requires line ministries to flag non-aligned Israeli-EU regulations by early 2025 and then adjust them to match EU standards. It is important that these changes are prioritised to remove regulatory barriers and make imports easier. Failing to do so would lessen the expected positive effects on product variety and prices.
4.5.3. Lowering barriers to services trade and investment
Services trade in Israel is more restricted compared to the average OECD country, as indicated by the OECD Services Trade Restrictiveness Index (STRI) (Figure 4.13, panel A), with modest progress observed over the past decade. The most significant constraint lies in barriers to foreign market entry, affecting all sectors. This is reflected in a high value in the OECD FDI Restrictiveness Index and a relatively low presence of foreign multinational enterprises in the Israeli market (Figure 4.13, panels B and C).
Openness to FDI allows capital and ideas to flow, contributing to innovation. By contrast, barriers to FDI hamper an important source of productivity spillovers. In Israel, inward FDI flows have increased steadily over the 2010s and 2020s, and been relatively resilient following the October 7 terrorist attacks (see Chapter 1 in this Survey). An important destination of inward FDI is the high-tech sector including for AI development over the past decade (see Chapter 2 in this Survey).
New entrants or their potential entry can heighten competitive pressures and reduce prices in relevant markets. While the short-term impact on trade from liberalising services may be modest, the long-term effects are typically substantial (Benz, S et al., 2023[37]). Services also serve as inputs in other sectors like manufacturing, thereby playing a pivotal role in coordinating the flow of goods, capital, and knowledge across different locations. Reducing trade costs in the services sector can thus spill over to other parts of the supply chain and enhance efficiency across sectors (Benz and Jaax, 2020[38]).
Israel could draw lessons from several OECD members that have implemented specific visa schemes for contractual services suppliers and independent professionals to liberalise services trade. For instance, the EU-Canada Comprehensive Economic and Trade Agreement (CETA) and the EU-UK agreement include provisions that facilitate cross-border services trade. Extending the duration of stay for all service providers and issuing work permits for spouses would enhance the attractiveness of the market for foreign service providers. Another example involves mutual recognition of regulations and domestic standards, akin to the UK-Switzerland Mutual Recognition Agreement for financial services in 2023 (Gov.UK, 2023[39]).
Notes: In Panel A, STRI indices take the value from 0 to 1. Complete openness to trade and investment gives a score of zero, while being completely closed to foreign services providers yields a score of one. In Panel B, the OECD Foreign Direct Investment Regulatory Restrictiveness Index (FDI RRI) measures four types of statutory restrictions on FDI: 1) foreign equity restrictions, 2) screening and prior approval requirements, 3) rules for key personnel, and 4) other restrictions on the operation of foreign enterprises. The FDI RRI is a composite index that takes values between 0 and 1, with 1 being the most restrictive. In Panel D, information and communication together with professional services make up most of Israel’s high-tech sector.
Sources: OECD Services Trade Restrictiveness Index (STRI) database; OECD FDI Regulatory Restrictiveness Index database; and OECD Analytical Activity of Multinational Enterprises (AAMNE) database.
4.5.4. Continuing to reduce corruption to strengthen trade and growth
Ensuring the rule of law is a key foundation of economic growth. By contrast, corruption hampers economic development and erodes public resources. Judicial independence and checks and balances are vital for a strong anti-corruption and public integrity framework, laying the foundations for a solid business environment. Moreover, a strong anti-corruption and public integrity system can help lower trade costs (see Box 4.5), by ensuring that public resources are efficiently allocated and businesses operate in an favourable environment. This helps to attract investments and reduce transaction costs, both domestically and externally, by fostering citizens’ trust in public institutions (OECD, 2022[40]; OECD, 2024[41]; OECD, 2023[3]). In Israel, perceptions of corruption are at the OECD average (Figure 4.14).
Notes: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Sources: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12.
The latest OECD Anti-Corruption and Integrity Outlook provides an overview on the accountability of public policy making in Israel (OECD, 2024[42]). For instance, lobbying regulations are not fully in line with OECD standards, as the definition of lobbying and lobbyists is incomplete and fail to include sanctions for breaches of related transparency and integrity standards (OECD, 2024[41]; Broyde, 2021[43]; The Israel Democracy Institute, 2013[44]). Regarding conflicts of interest, the country has fulfilled almost 90% of OECD criteria in terms of regulations but has only implemented around 20% of standard practices, against OECD averages of 76% and 40% respectively. However, sanctions for conflict-of-interest- related violations are prescribed and implemented in practice.
Rules are in place for “revolving doors”. For example, cooling-off periods are mandatory for post-employment activities of public officials, which safeguards transparency and may help improve public trust in institutions (OECD, 2023[45]). In terms of transparency and integrity in political financing, Israel is also performing well. National regulations prohibit financial contributions from anonymous donations, foreign states/enterprises and publicly owned enterprises, which is not the case in a number of OECD countries, in particular as far as anonymous donations are concerned. Israel also has an independent body overseeing the financing of political parties. However, the regulation in this area should be accompanied by more effective enforcement measures: for example, even if political parties must publish financial reports, not all of them comply with this requirement (OECD, 2024[42]).
In the area of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), Israel has made progress over the last two decades. It has evolved from being labelled a “non-cooperative” country to joining the OECD Financial Action Task Force (FATF) in 2018 as an official member. In 2002, Israel established an independent intelligence authority, the Money Laundering and Terror Financing Prohibition Authority (IMPA) within the Ministry of Justice, which has a leading role in AML/CFT and the application of the international standards set by the FATF (Government of Israel, 2024[46]). According to the latest FATF review in 2022, the country has achieved good results in tackling AML/CFT-related crimes, including through awareness of heightened risk exposure due to its geographical location, prosecution, effective use of financial intelligence, as well as expropriation of criminal organisations’ assets (Figure 4.15). Nonetheless, the FATF found that supervision and prevention measures could be further improved (FATF, 2022[47]).
Notes: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows results from the ongoing second round when available, otherwise first round results are displayed. Panel B shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Sources: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).
Good institutions can act as a source of comparative advantage, whereas poor institituional quality creates frictions that can hamper trade by raising transactions costs. This box utilises the empirical results from (Frohm and Quagiletti, Forthcoming[48]) to provide illustrative estimates of the long-term trade cost reductions that could be achieved if Israel improved some of its institutional qualities towards the OECD average. The analysis relies on the World Bank Governance Indicators developed by (Kaufmann, Kraay and Zoido-Lobatón, 1999[49]) which are widely used indicators in analyses of the effects of institutions on economic activity and trade.
Overall, Israel performs better than the OECD average in the World Bank Governance Indicators. At the same time, there is scope for improvement, for example in terms of rule of law and control of corruption (Figure 4.16, panel A). By leveraging the baseline empirical results from (Frohm and Quagiletti, Forthcoming[48])), based on data for 164 origin countries and 88 destination countries over 2001-2021, the illustrative simulations show that Israel may have scope to reduce its overall trade costs by 2.6 percentage points by improving its control of corruption and rule of law, see Figure 4.16, panel B.
Of these areas, bringing control of corruption towards that of the average could yield a two percentage points trade cost reduction, whereas improving the rule of law would yield roughly 0.6 percentage point in trade cost reduction.
Notes: Panel A shows Israel’s and the OECD average score on select World Bank Governance Indicators. Panel B shows the estimated trade cost reduction that can be achieved if Israel would improve its score on the indicators toward the OECD average.
In terms of accountability of public policy making and AML/CFT, the country’s system is broadly in line with the OECD and FATF standards (OECD, 2024[50]; FATF, 2022[47]). However, some progress could occur in areas such as the implementation of more effective enforcement measures in the context of financial reporting of political parties and conflict of interest, as well as in AML/CFT supervision and prevention measures. Overall, Israel should continue to strengthen its anti-corruption and public integrity system. This could also help to lower corruption perception and improve trust in public institutions, contributing to overall economic performance.
Persistent market inefficiencies and concentrated markets may initially limit the welfare gains when trade barriers are reduced. A low level of domestic competition and barriers to entry can enable companies to translate lower import costs into increased profits rather than passing savings on to consumers through lower prices. Improving the functionality of product markets and reducing entry barriers are critical steps towards fostering competition, boosting productivity and raising real incomes.
Over the past five years, Israel has implemented several reforms to enhance the functioning of its product markets and to increase competition (Figure 4.17). In 2021, the governance of state-owned enterprises (SOEs) was strengthened by clarifying their financial objectives and establishing guidelines for setting mandatory financial indicators and targets. The establishment of the Israeli Regulation Authority in 2022 marked a further step towards improving regulatory quality by revising the quality of regulatory impact assessments (RIAs). Nonetheless, Israel performs worse than the OECD average in the 2023-2024 Product Market Regulation (PMR) indicators, indicating considerable scope to enhance competition in several areas.
Product Market Regulation indicators, from 0 to 6 (most restrictive), 2023 (lower values indicate more competition-friendly settings)
Notes: The Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable. The scale ranges from 0 to 3.5 for visibility. PMR values in 2023 and 2018 are the same for “Interaction with stakeholders” and “Involvement in business operations in service sectors”.
Sources: OECD Product Market Regulation database; and OECD calculations.
Streamlining regulatory processes, implementing pro-competitive reforms, reducing barriers to entry, and improving public procurement practices will help reduce prices and boost productivity, which is crucial for increasing disposable incomes (Égert, 2016[51]). Despite Israel's high-tech companies often being global leaders, productivity has been sluggish in most other sectors (OECD, 2023[3]). While productivity is not solely influenced by competitive pressures, competition is a powerful catalyst encouraging firms to innovate, take risks and use resources more efficiently. Well-functioning product markets support growth by incentivising new and innovative market entrants and pressuring existing companies to lower prices.
Competition authorities play an important role in ensuring competitive conditions in many OECD countries, by conducting market reviews, evaluating regulations and analysing the competitive neutrality of SOEs. In some countries like Germany, the Competition Authority have received additional powers to intervene in a market irrespective of infringement of antitrust law, but where competition has been disrupted.The new powers fill a perceived enforcement gap in situations where harm to competition is not attributable to anti-competitive conduct but to other market characteristics, such as imperfect market structures. Such powers to impose remedies following a market investigation are also present at the United Kingdom’s Competition and Markets Authority (OECD, 2023[52]). In Latvia, additional powers were given in 2020 to the Competition Council to ensure competitive neutrality between SOEs and private enterprises, giving the Council the ability to impose fines and legal obligations against SOEs that break competition rules. Such regulation ensures a level playing field for all businesses, regardless of their relationship with the government. It also prevents situations where government influence can distort market competition.
In Israel, the Competition Authority plays a vital role in fostering competitive conditions. Recent years have seen an expansion of its mission, beyond enforcing the Competition Law, to preventing and eliminating anticompetitive practices (OECD, 2022[53]). The Authority is increasingly engaged in promoting pro-competitive policies and regulations. It is now actively involved in legislative processes across a broad range of sectors, including food, energy, transportation, finance, and communications. The Authority also provides advice to various ministries on numerous matters. Prioritising healthy competition as a central element of reform is a positive development and should continue to be pursued.
Administrative and regulatory requirements in Israel remain cumbersome (Figure 4.18, panel A). Procedures for starting a company are more complex than the OECD average. Prospective business owners must contact four different government bodies to establish a limited liability company (LLC) and three for a privately-owned enterprise. In OECD countries like Canada, France, Greece, and Poland, it suffices to get in touch with one public body to start a business. Additionally, two of the mandatory registration procedures for starting a privately-owned enterprise in Israel must still be completed in person. Allowing all procedures to be carried out online would reduce some of the burdens on prospective businesses (OECD, 2020[54]).
The Israeli authorities do not apply the “silence is consent” principle when issuing business permits and licenses. This practice, which helps to reduce administrative burdens, is utilised in more than half of the OECD countries. Although the total costs to complete all procedures to start a company in Israel are not particularly high, they could be reduced further. In approximately half of the OECD countries, these costs are zero. Furthermore, public bodies in Israel do not adhere to a maximum time frame for completing procedures. Establishing a clear timeline would provide certainty and facilitate planning for companies. In more than half of the OECD countries, laws or regulations specify a maximum time within which all or most procedures required to start an LLC must be completed by the relevant public bodies, as seen in Canada, Greece, and France.
While Regulatory Impact Assessments (RIAs) have been part of the Israeli regulatory management process for several years, there remains room for improvement (Figure 4.18, panel B). In this respect, Israel could learn from the experiences of other OECD countries in addressing regulatory challenges. For instance, Switzerland passed a Corporate Relief Act in September 2023, aiming to guarantee that new regulations are administratively lean and cost-efficient, thus reducing unnecessary barriers to company entry and growth (The Federal Council, 2022[55]; OECD, 2024[56]). The Act requires that all new regulations consider their burden compared to their benefits. Similarly, Sweden recently established a “Simplification Council” (Förenklingsråd) to identify and propose changes to laws and regulations to reduce the regulatory burden on companies (Tillväxtverket, 2024[57]).
Israel lags other OECD countries in its regulatory practices within digital markets (Figure 4.18, panel C). The rise of data-intensive markets, such as online marketplaces, search engines, and app stores, presents new competition challenges and may necessitate the introduction of targeted ex-ante regulations to complement ex-post enforcement of competition law.
Notes: In Panels A and C, the Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable. In Panel B, iREG scores are presented as an average of the results for developing primary laws and subordinate regulations. For Israel, results for regulatory impact assessment and stakeholder engagement apply exclusively to processes for developing primary laws initiated by the executive.
Sources: OECD 2023-2024 Product Market Regulation database; OECD (2023), Government at a Glance 2023, OECD Publishing, Paris, https://doi.org/10.1787/3d5c5d31-en; and OECD calculations.
In Israel, parties to a "merger of companies" as defined under the Competition Law, are required to submit pre-merger notifications, including under the circumstances that one of the parties to the merger's market share exceeds 50% (in any sector in Israel) pre-merger, and regardless of the other merging party's market share or sales in Israel. This threshold is particularly relevant for digital mergers. The Competition Authority has analysed whether acquisitions of Israeli start-up’s, by global digital companies, have prevented, eliminated or removed products or technological developments from the market, which may compete with the global companies in the future (so-called “killer acquisitions”). The analysis spanned the 2014-2019 period and covered 21 acquisitions, finding little evidence for such acquisitions in Israel (ICA, 2020[58]). The Israeli Competition Authority has also conducted a study on peer-to-peer (P2P) payment apps, illustrating how network effects can allow a single firm to dominate the market. Following this study, the 2023 Regulation of Payment and Payment Initiation Services Law was enacted, requiring P2P services to enable customers to receive funds from payers using different providers and to transfer funds to beneficiaries using other providers (ISA, 2023[59]).
The Competition Authority has proposed regulations like the EU's platform-to-business (P2B) regulation. The EU regulation (Regulation 2019/1150) aims at transparency and accountability in the relationship between platforms and businesses operating on them, by requiring clear terms, disclosure of ranking criteria, fair dispute resolution mechanisms, and transparency in data usage. Nonetheless, such regulations have not yet been incorporated into Israeli legislation.
4.7.1. Reducing the negative effects of state involvement in the economy
State involvement in the Israeli economy remains extensive. Price and quantity controls are applied to numerous products and services, many of which have been deregulated in most OECD countries (see Figure 4.19). For instance, 21 foodstuffs, including dairy products, and eggs, are subject to price controls. Milk prices are guaranteed and determined based on the average cost of production. Although these prices are regularly updated, they often diverge significantly from international market trends (OECD, 2024[4]). Similarly, wheat prices are guaranteed according to the Kansas market price, adjusted for quality and transportation costs. Quotas for egg production and border protection measures, provide price support to producers and form the basis for calculating maximum retail prices. Consequently, the share of potentially most-distorting forms of government support to the agricultural sector remains twice the OECD average (OECD, 2024[4]). Furthermore, prices are regulated for certain non-prescription medicines and taxi services, while professional service fees, such as those for lawyers, are subject to binding maximum fees for some activities.
Government-controlled prices and quantities are ineffective tools for ensuring affordability and equity. The absence of efficient price signals and responsiveness to changing conditions are key reasons why centrally planned systems often struggle to supply essential goods compared to market-based solutions. The Israeli authorities should work to progressively eliminate price and quantity controls to alleviate recurring shortages and allow market prices to influence consumer choices and economic behaviour more generally. The removal of price controls can be combined with targeted support to the most vulnerable households to ensure that inequalities are not exacerbated.
The Israeli government owns at least one company in 13 of the 24 sectors covered by the OECD Product Market Regulation (PMR) indicators. The Government Companies Authority, a subsidiary unit of the Ministry of Regional Cooperation, oversees government companies. This authority is responsible for more than 100 companies, including business and non-business governmental entities, subsidiaries, and jointly owned companies, such as the Israel Electric Corporation, Israel Aerospace Industries, Israel Railways, Ma’atz and Savings Funds. While the presence of SOEs does not necessarily indicate poorly functioning markets or a lack of competition, experience shows that SOEs can either promote or hinder economic and social development. This depends on the extent to which these companies operate within a sound regulatory and competitive environment, and whether the state acts as a professional owner.
Product Market Regulation indicator on retail price controls and regulation, scores, from 0 to 6 (most restrictive), 2023
Note: The Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable.
Source: OECD Product Market Regulation database.
While the governance of SOEs has improved, ensuring regulatory and competitive neutrality is an ongoing task, as markets and technology continue to evolve. Israeli SOEs have a formal rate of return target set by the ownership entity, which aligns with OECD best practices. However, there is still no requirement for having independent board members, and ministers are involved in the process of nominating the Chief Executive Officer of SOEs. Moreover, SOEs are not required to separate the services they provide in the framework of public service obligations from their commercial activities, and they do not receive adequate compensation for the fulfilment of public service obligations. Some SOEs also continue to have access to explicit government debt guarantees.
Regulatory agencies and the competition authority must continue to prevent market distortions and ensure the full and impartial implementation of relevant laws and regulations. Israel should continue to work towards aligning its SOE governance principles with OECD guidelines and towards best practice. For example, several OECD countries are reforming how they organise and exercise ownership of their SOEs. Nations such as Finland, Italy, Norway, Slovenia and Sweden manage their SOEs in accordance with international best practices, as outlined in the OECD Guidelines on the Governance of SOEs. These guidelines aim to: (i) professionalise the state as an owner; (ii) ensure SOEs operate with similar efficiency, transparency, integrity, and accountability as private enterprises adhering to good practices; (iii) ensure competition between SOEs and private enterprises occurs on a level playing field; and (iv) contribute to SOEs’ sustainability, resilience, and long-term value creation.
4.7.2. Fostering competition among Kosher-certifying organisations
Most foodstuffs sold in Israel adhere to the dietary laws of Kashrut, which govern which foods may be eaten and how they must be prepared and combined. This is chiefly due to consumer preferences that steer demand towards Kosher products. Kosher certification is not a legal requirement for importing food into Israel, apart for beef, poultry, and other meats. Nonetheless, products without Kosher certification hold smaller market shares, as a significant portion of supermarkets and hotels prefer to offer only Kosher-certified goods as a supermarket or restaurant cannot be considered Kosher unless all the products they sell are Kosher-certified.
To be certified as Kosher in Israel, a manufacturing company, restaurant, or hotel must be certified by local councils approved by the Chief Rabbinate (see Box 4.6). A reform of the Kosher certification system was passed in October 2021, with full implementation planned for January 2023. Under this reform, the Chief Rabbinate would no longer award certifications directly but would instead act as a regulatory body overseeing public and private institutions that issue certificates. The reform represented an important step towards enhancing consumer choice and increasing competition among certifying organisations. However, the law was repealed in 2023 before it could be implemented. The authorities should consider a new reform to increase consumer choice.
In Israel, the Chief Rabbinate’s presidency supervises a council and a network of local chief rabbis and serves as the authority on matters of Jewish law, including Kosher certification. The Ministry of Religious Services appoints and partially funds municipal and regional religious councils, which administer Kosher certification to local rabbis, who in effect have a monopoly in their given locality. Typically, the council sends a staff member to conduct an initial inspection of the applicant’s facility (such as a food producer or restaurant). If approved, the application is referred to the local chief rabbi, who formally grants certification by signing a certificate. The council then assigns a qualified inspector to provide ongoing supervision.
Certified businesses must pay annual fees to the local council to maintain certification, as well as the inspector's hourly wage set by the Chief Rabbinate. However, a company may also seek certification through private organisations, which may have even stricter interpretations of Kashrut than the local council. Under the current system, these companies must pay for the state-mandated Kosher certificate in addition to any other certificates to be branded as Kosher. One study found that just 12% of Kosher food products exclusively use the Chief Rabbinate certification (IDI, 2021[60]).
Foreign producers of foodstuffs and hygiene products wishing to be branded and sold as Kosher in Israel must also be certified by the Chief Rabbinate. A 2015 study by the Ministry of Finance estimated that consumers pay INS 2.8 billion (USD 750 million) directly and indirectly for the current system, with INS 600 million (USD 161 million) per year due to the monopoly of the Chief Rabbinate (RIC, 2017[61]). Another study by the Competition Authority in 2020 found that Kosher requirements on imports of dairy products increase costs by 1.9-9.9% (Competition Authority, 2020[62]).
Source: (Government of Israel, 2019[63]).
4.7.3. Improving public procurement practices
Israel's expenditure on public procurement exceeds the OECD average as a percentage of GDP and ranks among the highest as a share of government spending (
Figure 4.20, Panel A). The country's health and education systems are predominantly publicly funded and governed by the public procurement law. Additionally, infrastructure and utilities, including electricity, energy, and transport, largely managed by SOEs. Given that the state owns most of the land, real estate development projects often involve public procurement procedures. Spending on security, emergency, and safety is also included within the scope of public procurement, as are social services. Given the significant size and relative importance of public procurement in the Israeli economy, it is crucial that these processes be well-organised and carefully implemented to maximise competition and avoid costly solutions.
Notes: In Panel B, the Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable.
Sources: OECD (2023), Government at a Glance 2023, OECD Publishing, Paris, https://doi.org/10.1787/3d5c5d31-en; OECD 2023-2024 Product Market Regulation database; and OECD calculations.
Compared with other OECD countries, Israel has less competition friendly public procurement rules and regulations (Figure 4.20 Panel B). The procurement law does not mandate that the time allowed for submitting tenders should be proportionate to their size or complexity. This makes it challenging for smaller companies and new market entrants to participate in the bidding process. Ensuring longer submission times for larger or more complex tenders would allow more companies to participate, thereby increasing competition in the bidding process. This is for example mandated in EU legislation (European Commission, 2019[64]). The Israeli government has worked to facilitate the participation of small and medium-sized enterprises (SMEs) in public procurement. In 2023, 36% of public procurement was awarded to businesses with fewer than 100 employees, reflecting a positive shift towards increasing SME involvement in the procurement process.
Furthermore, the current system does not always allow bids to be submitted through online platforms (e-procurement). Enabling all bids to be submitted online could increase participation and generate more bids, thus enhancing competition and the overall benefits of public procurement in addition to facilitating systematic ex-post assessment (Bosio, Hayman and Dubosse, 2023[65]). Additionally, it is common practice in Israel to publish reference prices in tenders, which can facilitate collusion and price coordination among bidders. This may hamper competitive pressures and diminish the effective use of taxpayers’ money. Authorities should continue to align Israel's public procurement practices with the OECD Recommendation on Public Procurement.
Lowering entry barriers is essential for enhancing market competition, fostering innovation, and reducing prices for consumers. It allows prospective companies to enter the market, thereby challenging incumbent firms and disrupting monopolistic practices. Even if new companies do not enter, the threat of potential entrants can contain uncompetitive behaviour and facilitate competition by making markets "contestable" (Baumol, Panzar and Willig, 1982[66]).
In Israel, barriers to entry remain high in many sectors covered by the OECD Product Market Regulation (PMR) indicators Figure 4.21, Panel A). The country maintains a statutory state-owned monopoly in rail freight transport. Moreover, passenger rail transport services are not subject to competition. In contrast, rail freight transport has been opened to competition in all other OECD countries, and 90% of the countries allow private companies to provide transport services. Liberalising rail freight and passenger transport on some routes and enabling private companies to compete could provide consumers with more choices and lead to lower prices.
The competitive and monopoly parts of the Israeli electricity market have been legally separated since 2018, unbundling generation and retail supply from transmission and distribution, and separating system operation and design, to ensure independent decision-making and avoiding risk of discrimination in access to the monopolistic infrastructure. Since January 2024, power generators have been able to sell directly to electricity suppliers. These companies can now supply electricity through the grid, directly to customers across Israel. Consumers with a smart meter have been allowed to choose among retail suppliers and since July 2024, all consumers can do so. 18 companies with an electricity license are active on the market. An online independent price comparison tool facilitates price comparisons. Initially, switching rates were low as only about 15% of households with a smart meter could choose an alternative supplier. Since July 2024, all households could choose among electricity suppliers and more than 100,000 have switched, reaching or even exceeding the government’s target of 100,000 customers by the end of 2024.
For the wholesale market, there is currently no organised market for the purchase and sale of electricity. However, bilateral transactions between sellers and buyers are possible. Establishing an organised wholesale market could facilitate the sale of electricity between industry participants, ease entry and contribute to price reductions.
Entry barriers are also significant in several professional services sectors, such as attorneys, architects, and real estate agents (Figure 4.21, Panel B). Legal firms cannot have limited liability, and only attorneys are permitted to hold ownership and voting rights, with business cooperation with other professions within the same company prohibited. Such restrictions inhibit market entry, new business models and innovative practices, and limit access to managerial skills and investment sources. While there may be valid reasons for regulating entry into professions where specific competencies are critical and malpractice can lead to significant harm, these barriers can unduly protect incumbents, stifle business dynamism, and impede aggregate productivity, entrepreneurial initiative and innovation.
Product Market Regulation indicators, scores, from 0 to 6 (most restrictive), 2023
Notes: The Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable.
Sources: OECD Product Market Regulation database; and OECD calculations.
4.8.1. Making it easier to become an importer
The wholesale trade sector in Israel remains highly concentrated for food products. Three food suppliers account for 84% of the market in 20 consumer products and importing is similarly concentrated (State Comptroller, 2024[67]). Despite progress in relaxing import procedures and rules (see the previous section of this Chapter), laborious and complex processes for importing continue to hinder market entry.
One reason in the food sector is the distinction and procedural separation made by the Ministry of Health between two categories of products: "normal " and "sensitive” foods (including dairy products, eggs, meat, fish, preserves, baby food, honey and nutritional supplements). While these standards aim to protect public health, they also result in additional costs that are passed on to consumers. The process for sensitive food involves more extended approval and inspection times compared to regular food. For example, the approval process for regular food can take an average of 3 days, while the process for sensitive food may take between 74 and 111 days (State Comptroller, 2024[67]).
Amendments to the Public Health Law between 2021 and 2022 aligned some of Israel’s food standards with health standards of the European Union, marking a significant step forward in food safety, quality and harmonisation of rules. However, there are still gaps. Products such as olive oil, chocolate, and honey are still affected by restrictive standards. Such products must have an Israeli standards expert to affix nutritional labels and ingredient lists that may differ from those used in global markets. In its 2024 report, the State Comptroller recommends that the Ministry of Health and the Consumer Protection Authority expedite their examination of food and consider adopting European standards for remaining products (State Comptroller, 2024[67]). Adopting standards and labelling requirements of large trading partners would simplify importing by reducing the need for additional testing and certification.
Import licences or permits under the Free Import Order are typically issued within 14 working days of receiving all necessary documentation. However, the Ministry of Health’s National Food Service and Pharmacy Department or the Competent Authority in the Ministry of Transport, National Infrastructure, and Road Safety generally provides their decision within four working weeks of receiving all documents (Ministry of Economy and Industry, 2019[68]).
To reduce entry barriers and enhance competition, the rules and procedures for obtaining import licences could be made less stringent, and the validity of licences could be significantly extended. For instance, in the European Union, the Economic Operators Registration and Identification (EORI) number is permanently allocated to companies that remain in business. The process for receiving the EORI is straightforward for registered businesses and typically takes one day across EU member states if applications are complete (European Commission, 2022[69]).
4.8.2. Facilitating competition in the banking sector
The Israeli banking sector is relatively profitable (Figure 4.22, panel A) and has a more limited number of banks than in most OECD countries (Figure 4.22, panel B). Five banking groups account for 98% of total assets. Moreover, two independent banks and four branches of foreign banks account for only a small proportion of the domestic credit market, although concentration in the credit market has not materially changed over the past years (BoI, 2022[70]).
Following several decades during which the number of commercial banks declined due to consolidation in capital markets, a new independent digital bank began operations in 2022, and a banking licence for an additional digital bank was granted during the year. The introduction of digital platforms can reduce bank’s markups and reduce concentration directly but also through the threat it creates for incumbents (Koont, N, 2023[71]; Doerr et al., 2024[72]), thereby increasing access to credit and reducing its cost.
Increasing competition in the financial sector is a secondary objective for the Bank of Israel Banking Supervision Department alongside the primary goal of financial stability. A reform of the mortgage market in 2021 eased the comparison of mortgage offers across banks. In 2019, the Bank of Israel established a credit data register to reduce information gaps between large credit providers and smaller credit providers with a view to ensuring that customers can receive better priced credit offers. A study by the Bank of Israel found that the introduction of the credit data registers has significantly reduced interest rates for customers (Segev, Shaton and Bank, 2023[73]). Furthermore, credit card companies were separated from banks in 2018 and open banking was implemented, meaning that, with customer consent, information could be shared with third parties to improve services provided to the customer, encourage the entry of new financial players and increase competition in the sector. Moreover, the Bank of Israel website improves information availability by providing comparable data to the public,.
Since 2021 bank customers have also been able to switch banks online easily and at no cost. The switching process can be completed within seven business days. This reform represents significant progress in simplifying the process of switching banks and is expected to enhance competition within the banking system. After one year of the reform, approximately 100,000 applications had been submitted to switch banks through the online system, and more than 65,000 customers had successfully changed banks (BoI, 2022[74]). Easing the process of switching banks can further encourage innovation and increase efficiency, and such efforts should continue. A review of competitive conditions in the banking sector could be considered to assess the impact of switching and new entrants.
The Bank of Israel, the Ministry of Finance, the Israel Securities Authority and other government agencies have also taken steps to advance innovation and competition in the payments market. The Regulation of Payment Services and Payment Initiation Law, 5783–20233 enables nonbank entities to obtain a license and to participate in the payments area. The law was passed in May 2023, and enables the Israel Securities Authority to issue licenses to nonbank entities to function as payment service providers. Enabling entry of new providers in the payments market is a welcome development and should be continued to be monitored and adapted to reduce barriers to entry while ensuring financial stability.
Note: In Panel B, 2022 data for Ireland.
Sources: Bank of Israel; European Central Bank (ECB); IMF Financial Access Survey; OECD Population Statistics database; and OECD calculations.
The Bank of Israel, the Israel Securities Authority and the Ministry of Finance has started a review of fees in the capital market (BoI, 2024[75]). Initial findings suggest that there are difficulties for consumers in comparing costs between different service providers due to variations in fee structures, limited accessibility to investment advisory services, and a lack of alignment between the services provided and the payment for them. A planned reform aims to improve the comparability of different offers and to increase transparency around different pricing models. This review is welcome and can help increase competition in the market.
Reducing entry barriers is key to foster competition to raise productivity. Another important aspect of economic dynamism is the ease with which companies that are no longer viable can exit the market and release valuable resources (labour and capital) to more productive organisations. The insolvency framework is key in shaping companies’ exit, and can facilitate corporate restructuring and promote entrepreneurship by offering a second chance to failed entrepreneurs. Sound insolvency frameworks can thus spur economic reallocation and productivity growth (Adalet McGowan and Andrews, 2018[76]).
In Israel, the insolvency framework indicator is above the average of OECD countries (Andre and Demmou, 2022[77]). The personal costs to failed entrepreneurs remains higher than the OECD average, due to relatively less efficient liquidation processes. Bankruptcy prevention and simplified insolvency procedures for micro, small and medium-sized companies MSMEs could be introduced to ease the exit of unviable firms. A new law that encourages debt restructuring passed first reading in the Knesset in December 2024, and aims to incentivise debt negotiations among companies and creditors at an early stage to increase chances of economic rehabilitation.
OECD insolvency indicator main sub-components, 2022
Note: The scores for the three main sub-categories are scaled from zero to one, with lower scores indicating more favourable frameworks.
Source: OECD 2022 questionnaire on insolvency frameworks.
Housing is a key determinant of the cost of living and often represents Israeli households' largest expenditure. On average, households spend about a quarter of their disposable income on housing, with higher-income households spending significantly less and poorer households spending considerably more (Figure 4.24, Panel A). The overburden rate - the share of the population spending more than 40% of their income on housing - is 54%, one of the highest in the OECD.
The high cost of housing has led to social unrest in 2011, when tent protests spread across major Israeli cities. Since then, housing has only become less affordable, sparking further demonstrations, such as in Tel Aviv in 2022. The combination of strong demand, low interest rates, high household savings and limited land availability has driven rapid house price growth over the past decade. Since 2015, real house prices have risen by 39%, above the OECD average that rose by 32%, and rents by 7%, below the OECD average of 13%. (Figure 4.24, Panel B).
Note: Panel B, real house price data for the euro area refers to 2023.
Sources: Israel Central Bureau of Statistics; OECD Analytical house prices indicators database; and OECD calculations.
In a well-functioning market, rising prices would typically incentivise more supply to meet demand. Housing supply in Israel has however historically been less responsive to price increases than in most other OECD countries (Cavalleri, Cournède and Özsöğüt, 2019[78]; OECD, 2020[79]). The sluggish response indicates market frictions, which harm social inclusion, as high prices make affordable housing increasingly inaccessible, particularly for low-income households (Grossmann et al., 2019[80]).
Following nearly a decade of stagnation, the number of building permits rose substantially in 2021-23 (Figure 4.24, panel C). It is however too early to determine if this increase is partly fundamental or mostly reflects a catch-up following COVID-19, even more so as the 7 October attacks and subsequent war disrupted housebuilding activity (see Chapter 1).
Increasing the housing supply is critical to reducing living costs. Simplifying restrictive planning regulations, boosting urban renewal projects and improving transport infrastructure as well as public transit to urban centres are essential steps. A better property tax-mix can incentivise housing construction. Over the medium term, housing supply creation also requires remedying construction worker shortages (see Chapter 1).
4.9.1. Streamlining planning and building regulations
Israel's planning and building regulations are cumbersome by international standards. The country scores above the OECD average in the number of licenses and permits required, according to the OECD’s Product Market Regulation (PMR) index (Figure 4.25, Panel A). While permits aligned with building plans are legally required to be issued within 90 days, the average time to issue a building permit was 319 days (for permits matching approved plans) in 2019. For permits with requested modifications (concessions or special uses), the average time extended to 407 days (State Comptroller, 2021[81]).
Notes: In Panel A, the Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable. In Panel B, weighted average, according to the number of apartments in the building. In Panel C, data refers to the number of answers of companies participating in the Business Tendency Survey conducted by the Israel Central Bureau of Statistics (CBS). Labour shortages values are an average of values for labour shortages for wet-work, non-wet work and non-skilled work.
Sources: OECD Product Market Regulation database; Israel Central Bureau of Statistics; and OECD calculations.
Currently, around 120,000 housing units are in various stages of the permitting process. The time taken to complete an apartment project, from planning to occupancy, is about 13 years, with the average construction time nearing three years, increasing by 0.4 months per year since 1995 (Figure 4.25, Panel B). Delays in permit approvals and limited land availability are the primary growth obstacles for Israeli construction companies (Figure 4.25, Panel C). Although several regulatory reforms have been introduced over the past decade, these issues remain consistent barriers since 2015, when the questions were first posed.
The Planning and Building Law (1965-5725) mandates multiple approvals from local planning and building committees before any construction can begin. This multi-layered approval process includes zoning verification, environmental impact assessments, and municipal plan compliance. While regulations are necessary to address externalities like environmental concerns and transport congestion, excessively lengthy permitting processes deter investment and slow construction.
In 2023 the Planning Authority released a set of new guidelines aimed at facilitating the transition between detailed local plans and the licensing process, by requiring adherence between planning and permitting. These newly established protocols are expected to improve the licensing procedures and shorten processes. Furthermore, Amendment 134 to the Planning and Building Law (1965-5725) enables a new licensing procedure titled “self-certification”, which grants authorised architects the responsibility to check and approve permits instead of the permitting authorities.
Furthermore, to ease the regulatory burden and accelerate permitting, the "plan plus permit" reform was implemented in 2024. The “Expedited Licensing Plan – Amendment 139 to the Planning and Construction Law” streamlines the approval process by allowing urban renewal plans and permits to be granted in a single hearing. This reform is expected to reduce approval timelines by one to four years. Under the new regulation, plan and permit applications will progress in parallel, and some procedural steps have been eliminated or combined to make the process more efficient. Close monitoring of the implementation will be crucial to ensure these changes lead to faster, less cumbersome approvals. Additionally, the existing permit backlog must be addressed swiftly under the new framework.
4.9.2. Maintaining support for urban renewal programmes
Given high population density (Figure 4.26, panel A and B), effective regulation is essential to make efficient use of space. Urban renewal is central to the government’s strategy to increase housing supply in densely populated areas like Tel Aviv (Figure 4.26, panel C). The Government Authority for Urban Renewal oversees laws aimed at streamlining the renewal process and removing bureaucratic barriers, while also protecting tenant rights in designated renewal areas. The authority works with localities to plan and promote these projects, which include both the renovation and reconstruction of existing buildings. Another aim is to increase the resilience of housing and infrastructure to security threats and natural disasters, which may increase in frequency and intensity under the impact of climate change (Chapter 3).
For a renewal project to proceed, apartment owners must agree by a two-thirds majority to hire a developer, reduced from 80% in 2021. Owners receive new, often larger apartments at no additional cost, while developers finance the reconstruction by selling additional units. The revenue from these sales is partially tax-exempt. Since 2021, urban renewal projects have increased, with roughly 40,000 units approved in 2022 and 41,000 in 2023 (Figure 4.26, Panel D).
The government should continue promoting urban renewal in high-density areas to add more housing units to the current stock. A benefit of this programme is that it enables expanding housing supply in areas of high demand without generating urban sprawl (OECD, 2018[82]; OECD, 2024[83]).
Note: In Panel A, OECD highest five excludes Israel.
Sources: UN, World Population Prospects 2024; OECD Regional Statistics database; and "Urban renewal report 2023," The Governmental Authority for Urban Renewal, April 2024, https://www.gov.il/he/pages/urban_renewal_report_2023.
4.9.3. Improving rental regulation and public housing policies
Israel’s landlord-tenant regulations are less stringent than the OECD average, which supports economic flexibility and mobility (Figure 4.27). However, rental regulations must strike a balance between allowing landlords to achieve satisfactory returns and providing security for tenants, especially as more people spend longer periods in the rental market before buying homes. In 2023, about 795,000 rental units existed in Israel, comprising 29% of all housing units, up from 25% a decade earlier. It is estimated that two million Israelis live in rented dwellings, most of which are privately owned and managed by individual landlords.
The 2020 Economic Survey recommended that Israel increase rental price transparency by collecting information on local reference rents, as is done in Germany. Such a policy would provide clearer data on price developments in the rental market, reducing information asymmetries between landlords and renters. In August 2024, the Ministry of Construction and Housing announced a strategic plan for the rental market, which includes collecting and sharing rental market data, encouraging long-term rentals, and identifying land for rental housing projects. Currently, the government has only partial information about the rental market. Authorities are gathering data through platforms such as Yad 2 (Israel’s largest second-hand marketplace) and the Israel Mapping Centre, along with data from about 220,000 households receiving rental assistance and government-supervised companies renting out apartments. This increased data collection will facilitate price comparisons, increase market competition and potentially reduce rents.
Landlord-tenant regulation indicator, from 0 to 1 (most stringent), 2021
Notes: Indicator capturing the intensity of regulation related to tenants’ protection from eviction, tenure security and deposit requirement. The indicator ranges between 0 and 1, with a higher number indicating greater stringency. Overly stringent landlord-tenant regulations tend to reduce residential mobility which could impair the functioning of labour markets.
Source: OECD Housing Policy Toolkit.
Social housing in Israel is relatively scarce compared with other OECD countries (Figure 4.28). Public housing units have historically been sold to tenants at discounted rates to reduce poverty and support private home ownership, which has diminished the social housing stock. Properly targeted social housing programs can alleviate the cost of living for those in need, but they must also avoid locking residents into neighbourhoods with limited employment opportunities (Chetty et al., 2014[84]). Therefore, social housing should be built in areas with good access to jobs and transport links (see the next section). Additionally, the government should frequently reassess eligibility criteria for public housing and consider promoting mixed-income neighbourhoods.
As of August 2024, new rent subsidies are available for low-income households. Previously, individuals waiting for social housing could receive increased rent assistance, but this assistance was withdrawn if they declined two social housing offers. Under the new policy, eligible citizens opting for private rentals will continue to receive increased assistance throughout their eligibility period. While targeted transfers are often preferable to direct government intervention, focussing on rent assistance in the face of rigid housing supply can boost rent levels and home prices, ultimately exacerbating inequalities by transferring wealth from taxpayers to landlords (OECD, 2021[85]). The government should prioritise expanding public housing units, targeted at low-income households, in areas with good public transport connections to the major urban centres with employment opportunities. To avoid undue burden on public finances in the future, revenues from public housing rents can be recycled into building more units through revolving financing mechanisms, where rents from older parts of the social housing stock be used for new investment (see Box 4.7).
Social rental dwellings, as % of the total housing stock, 2022 or latest available year
Note: Data for Israel refers to 2023.
Source: OECD Affordable Housing Database (AHD).
Austria
Revolving funds support the development and maintenance of the social housing stock. Approximately 40% of a typical project is financed through bank mortgage loans with a maturity of 25 years (1.5% interest rate), with the remainder financed with public loans (35-year maturity and 0.5-1.5% interest rate) and equity contributions from housing associations. A Limited-Profit Housing Act sets out the key governance principles for housing associations, including a limitation of nominal capital paid out to shareholders, a calculation of prices based on actual costs, a continuous reinvestment of capital and a regular audit of the efficient use of resources and the compliance with the Limited-Profit Housing Act. Any surpluses generated are strictly regulated.
Denmark
The National Building Fund is an independent institution outside the state budget. Funding is based on a share of tenants’ rents (amounting to 2.8% annually of the total acquisition cost of the property), in addition to housing associations’ contributions to mortgage loans (approximately 2% of the property acquisition cost). Payments are adjusted annually for the first 20 years after loan take-up, and then by a slightly lower rate until the 45th year, after which they are maintained at the nominal level reached. A share of tenants’ rent is used to pay off the housing agency’s mortgage loan for the first 30 years (approximately), at which point the share is allocated to the state for another ten years. Once this period is over, the share is allocated to the National Building Fund. Approximately one-third of the Fund’s resources are used to support the construction of new social housing. In this way, each housing organisation contributes to and can borrow from the Fund, which supports a wide range of activities, including renovation work in the existing housing stock.
Source: (OECD, 2020[86])
4.9.4. Investing in better transport infrastructure
Extensive and efficient transport infrastructure is vital for ensuring market accessibility, enhancing productivity, promoting labour mobility, and connecting communities. Good transport infrastructure allows people to live further away from city centres that are typically more expensive and, could boost housing construction in less expensive areas, thereby lowering housing prices.
Note: Panel A, 2021 data for Israel.
Sources: International Transport Forum (ITF) database; OECD Population Statistics database; and OECD calculations.
Israel has one of the lowest road densities in the OECD, both in terms of population and land area. Most of the travel is done by road, with approximately 72% of the adult population owning a private vehicle, a significant increase from the 1970s when only 30% of vehicles were privately owned (INSS, 2024[87]). This rise in private car ownership has put pressure on existing road infrastructure and the environment, leading to widespread congestion (Figure 4.28 panel A). For instance, in 2021, Tel Aviv was ranked 16th out of 404 cities globally for traffic congestion, measured by the additional time lost to traffic compared to free-flowing conditions (TomTom, 2021[88]).
Israel lags particularly behind in public transport infrastructure, which incurs significant economic costs (OECD, 2023[3]). Limited access to public transportation, notably by train (Figure 4.28, panel B), and lengthy commuting times reduces incentives for workers, especially those from lower-income areas, to travel into metropolitan centres. It also reduces incentives to build housing in areas further away from those centres. In 2023, the Ministry of Transportation announced a five-year plan to enhance the country’s transportation network, focusing on upgrading public transit systems and roads. The plan, estimated to cost NIS 50 billion (USD 14 billion), marks a significant step toward addressing these deficiencies. Increased investment in public transportation, especially in urban areas, is crucial. Raising public investment in infrastructure by 1% of GDP can potentially boost GDP by 1.5% after four years, with even greater benefits depending on the efficiency of the investment (Abiad, Furceri and Topalova, 2016[89]).
However, delays in project implementation have hindered progress in Israel. For example, the completion of the fourth railway track along the Ayalon, initially slated for 2028, has been postponed to 2032, and the Green Line of the Gush Dan light rail system has been pushed back from 2027 to 2030. To expedite infrastructure projects, Israel must adopt a more coherent, predictable, and efficient regulatory framework. This requires better coordination of infrastructure policies across all levels of government, in alignment with the OECD Recommendation on the Governance of Infrastructure (OECD, 2020[90]). As recommended in previous Surveys, establishing metropolitan transport authorities can help improve coordination between the central and local government, and promote integrated transport and pricing solutions.
In tandem with increased investment in public transport, congestion charges can effectively reduce peak traffic, thereby reducing commuting times as well as lowering emissions. The Congestion Charge Law, passed in 2021, is set to be implemented in Tel Aviv in 2026. This law will create incentives for commuters to shift toward public transport and ensure a more efficient use of the road transport network, as private vehicles entering the city will be subject to tolls. To ensure successful implementation, the government must collaborate closely with local authorities. Moreover, to mitigate the potential impact on low-income households, the revenues generated from congestion charges could be reinvested in improving public transportation services including in low-income areas.
4.9.5. Improving the property tax-mix to incentivise housing construction
Recurrent taxes on immovable property in Israel constitute a significant share of total tax revenues (Figure 4.30, Panel A). At the regional level, property taxes account for more than half of all tax revenues (Figure 4.30, Panel B). As is common in most OECD countries, various taxes are applied to housing, depending on the type of housing investment. These include taxes on realised capital gains, transaction taxes, and recurrent property taxes (Thomas, 2021[91]). The details of the property tax mix can either help encourage more housing investment or discourage an expansion of the housing supply.
For example, rates of recurrent taxes on immovable property in Israel are typically significantly higher for commercial properties than for residential properties, incentivising municipalities to prioritise commercial over residential development. This incentivises developers to build commercial buildings rather than housing units, exacerbating the cost of living. As highlighted in previous Economic Surveys, these discrepancies should be addressed by lowering non-residential property tax rates and raising residential rates. Such reforms should be carefully designed following a thorough review of their potential distributional impacts across households and municipalities.
Israel applies a specific tax on housing transactions (Mas Rechisha), based on the purchase price of the property with progressive rates. Different rates apply for those purchasing their first property or upgrading a single property. While many other OECD countries impose transaction taxes on housing (OECD, 2022[92]), such taxes are widely regarded as inefficient, as they create distortions in both housing and labour market by disincentivising transactions and thus hampering an effective use of the housing stock.
A potential reform could involve eliminating transaction taxes on both first and second property purchases, and instead increase residential taxes on immovable property. This would help reduce distortions in the housing and labour markets, with any revenue loss offset by increases in recurrent property taxes and taxes on rental income. The current immovable property tax (Arnona) is a municipal tax levied on the user of the property. Unlike in many other countries, Arnona is not based on market value but on the size (square metres), location, and type of property, and is paid by the user rather than the owner. To increase efficiency, reforms should aim to shift the tax base from property characteristics towards market valuations. A common objection to value-based taxation is the infrequent updating of property values. However, this issue can be mitigated through data-driven techniques, which use mathematical models or data from digital platforms listing properties for sale to estimate property values. This approach can reduce the costs associated with frequent property revaluations (OECD, 2022[92]).
A working group within the Israeli government has been established to analyse the structure of the current property taxation (Government of Israel, 2024[93]). One preliminary proposal is that unrealised real estate assets such as empty apartments or vacant land is taxed. A purpose of the tax is to promote residential construction in abandoned or empty areas and encourage property owners to use them for housing purposes. Such a proposal is welcome and the taxation of vacant property would help incentivise their effective use.
Source: OECD Global Revenue Statistics database.
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