OECD Report Criticizes Israel's Energy Shock Response Ahead of Elections
The Organization for Economic Co-operation and Development (OECD) has identified Israel as one of five member nations that have taken no action to mitigate the energy shock caused by the conflict in the Middle East. This finding appears in a footnote to the OECD's interim global economic outlook report, based on data from September 14. Just a week prior, on September 7, Israeli Finance Minister Bezalel Smotrich reduced the excise tax on gasoline. This discrepancy highlights a broader issue: how governments respond to energy shocks when money is already expensive, and when responses are dictated by election schedules rather than market prices.
In early September, the price of 95-octane gasoline reached a historic high of 8.25 shekels per liter. Six days later, the excise tax component was lowered, resulting in a price drop to 7.75 shekels per liter. This reduction, approximately 42 agorot per liter before VAT, was initially set to last until October 31, just days after the upcoming Knesset elections on October 27. The OECD report suggests that support measures should be targeted towards the most vulnerable households and sound small and medium-sized businesses, incentivize energy saving, and have a clear expiration mechanism. However, the report found that only about half of the measures implemented by countries are targeted.
The OECD specifically identifies energy tax cuts as an untargeted and costly tool, which is precisely what Israel implemented. The Israeli reduction fails to be targeted, as every liter receives the same discount, disproportionately benefiting those who drive more. It also weakens incentives to save energy by directly impacting the price at the pump. Furthermore, the measure only applies to gasoline, not diesel, affecting commercial transport and supply chains. The report notes that while 27% of energy support measures have expired, 17% have been extended beyond their original end dates. In Israel, the decision on whether to reinstate the tax will fall to a new government formed after the elections.
The OECD's report also addresses broader economic trends, including record-high long-term government bond yields in developed economies, driven by concerns over long-term fiscal risks and significant bond issuances by artificial intelligence companies. The organization urges governments to curb and prioritize spending within credible multi-year plans. While Israel is not included in the G20 country forecasts, its increased defense spending places it in competition for capital, and investors are likely scrutinizing reports like the OECD's. The primary concern regarding Israel's fuel tax cut is the precedent it sets; a government that lowers fuel prices before an election may struggle to justify price increases afterward. The expectation is that the excise tax will not return to its previous level by November 1, potentially placing Israel among countries that failed to withdraw support measures in a timely manner.
