Israel should take additional measures beyond those proposed by the Trajtenberg Report to increase Arab and Haredi labor force participation, the International Monetary Fund said Monday.

The IMF’s recommendation was contained in its annual report on Israel, which it released Monday – about two months after the visit here of a four-person delegation led by European division chief Peter Doyle.

The report proposed: expanding the provision of basic child care and transportation in Arab areas; equalizing the quality and quantity of education provision in Arab communities with that elsewhere; seeking alternatives to the Tal Law so that more Haredi men are able to serve in the military or civic activity; removing impediments to business establishment in both communities by increasing infrastructure investment; and strengthening enforcement of labor regulations.

It acknowledged the government’s encouragement of economic activity in Arab communities and the Trajtenberg Committee’s support for reducing the marginal tax rate on employment and ensuring equal opportunities in the labor market. But it said that given the anticipated rapid change in Israel’s demographic structure, reform initiatives must be expanded, accelerated and deepened.

Looking at the overall picture, the report said Israel emerged from the 2008-09 global financial crisis with strong economic growth, a resilient banking system, and low unemployment, and predicted it would not experience a severe downturn in the near-term.

Israel’s financial system appears robust in the context of a global and local slowdown, it added.

Raising civilian expenditure would be a good way to tackle low participation among minority groups and raise investment, the report said. It proposed that in order to reduce inequality, the social welfare system could be made more targeted and increasingly conditional on employment without significantly increasing the amount of spending.

Public expenditure in Israel represented 44.3 percent of GDP in 2008, similar to the OECD average of 43.7%, the report said. But it pointed out that the magnitude of defense spending means Israel’s civilian expenditure is among the lowest in the OECD. It said the 7.3% of GDP Israel spent on defense in 2008 was more than four times the OECD average and well above the 4.6% of the second-biggest spender, the United States.

It called into question the effectiveness of education spending in particular, pointing out that Israel ranks among the worst performers in the OECD’s Program for International Student Assessment. Education expenditure in Israel is similar to other developed countries that achieve much higher results, it said, suggesting that the poor results might derive partly from the fact that class sizes here are significantly higher than in those countries.

The report welcomed the authorities’ commitment to maintain the total spending limits in the 2012 budget. But it warned that unfunded fiscal commitments of around 0.75% of GDP made in response to last year’s social protests would have to be resolved within the budget framework. Pointing out that the 2012 deficit is projected to overshoot the 2% ceiling by almost 1.5 percentage points, it said fiscal policy must remain focused on debt reduction in the near term by adhering to spending limits set by Israeli law.

Members of Knesset received special praise for passing the new Bank of Israel Law in 2010, which the report said aligns the Bank of Israel’s de jure with that of the world’s most modern inflation- targeting central banks. It said the new law correctly identifies price stability as the primary objective of policy, grants the bank a considerable degree of independence, strengthens its management, and makes it more accountable.

Based in Washington, DC, the International Monetary Fund is an organization of 187 states whose objectives are to promote international economic cooperation, trade, employment and exchange rate stability. Bank of Israel Governor Stanley Fischer nominated for IMF managing director last year, but was disqualified because of his age. (© 1995-2011, The Jerusalem Post 04/02/12)