Israel Tops OECD Rankings for Cost of Living - prices soaring 38% above the average

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by Ifi Reporter Category:Financial Aug 26, 2023

In a recent OECD report, Israel has claimed the unenviable top spot for the highest cost of living among member countries, with prices soaring 38% above the OECD average. Despite efforts to mitigate the impact through compensatory measures targeting specific voter groups, experts argue that the underlying issue of economic centralization remains largely unaddressed.

The government's approach of distributing benefits to select sectors in exchange for support has come under scrutiny as it fails to tackle the deep-seated structural problems contributing to the rising costs. Food subsidies, increased allowances for the ultra-Orthodox community, and territorial fund allocations, though providing short-term relief to some groups, are viewed as inadequate for creating lasting change.

The spotlight was recently cast on Prime Minister Benjamin Netanyahu's declaration of Israel's advancement on the global stage during the inauguration of the long-awaited Gush Dan light rail system. Critics found it difficult to reconcile the statement with the three-decade lag in completing the light rail project in the country's largest metropolitan area.

The report highlights a trend that has been gaining momentum since 2009, indicating a significant hike in living costs around the time when Netanyahu began his second term in office. This increase is attributed to various factors including high market concentration in key sectors such as food, agriculture, and government services. Moreover, the influence of exclusive importers and currency fluctuations further contributes to the steep prices.

Though efforts have been made to curb the escalating expenses, such as reforms in banking and the food industry, the impact has been limited, and the nation's ranking on the cost of living index continues to climb. One noteworthy exception is the competitive reform undertaken in the communication services sector, resulting in comparatively affordable prices.

Even in the housing sector, where the government holds significant control over land, planning, and taxation, little progress has been made in reducing prices. Recent drops in housing costs are primarily attributed to interest rate hikes and increased mortgage payments. The burden of the government's past housing policies is now borne by renters, who have witnessed a sharp surge in rents.

While public outcry against the high cost of living has been relatively muted, experts suggest two potential explanations. Firstly, the ongoing focus on political upheaval has diverted attention from economic concerns, particularly as protests against the government are seen as reflecting the interests of established classes. Secondly, the government's compensatory measures, aimed at securing support from various segments, have forestalled larger-scale social unrest.

However, the push for these strategies is contributing to the weakening of the Israeli shekel, thereby inflating the prices of imported goods and stoking inflation. The Bank of Israel reports that a 10% depreciation in the shekel exchange rate corresponds to a 1.5% increase in inflation. Since the government's formation, the shekel has depreciated by 11% against the dollar.

The current state of affairs underscores the pressing need for comprehensive reforms in the Israeli economy. Without such changes, the country's ranking as the OECD's most expensive nation remains likely, and the persistent challenges posed by a high cost of living will continue to impact citizens across the socioeconomic spectrum.

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