C O N F I D E N T I A L SECTION 01 OF 04 TEL AVIV 000450

SIPDIS

E.O. 12958: DECL: 01/30/2016
TAGS: ECON EFIN PGOV IS ECONOMY AND FINANCE ISRAELI SOCIETY
SUBJECT: POVERTY SITUATION IMPROVES AMID HEADLINES TO THE
CONTRARY

REF: 05 TEL AVIV 7051

Classified By: Deputy Chief of Mission Gene A. Cretz for reasons 1.4 b
and d.

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Summary
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1. (C) The poverty report released on January 23 by the
Israeli National Insurance Institute (INII) indicates a
marked slowdown in the rate of increase of poverty in Israel.
At a time when the sharp cut in welfare payments resulting
from the enactment of the Netanyahu economic reform program
in 2003 is being blamed by politicians and the press for a
drastic increase in severe economic distress, the report
shows that the situation has begun to improve, albeit slowly.
While the number of children living in poverty has
increased, the number of families below the poverty line has
stabilized, and the number of elderly living in poverty has
decreased slightly. The Arab and Ultra-Orthodox Jewish
sectors, however, remain mired at the bottom of the economic
ladder. Despite the inflammatory statements of some
politicians and commentators who have seized on the report in
this election season to attack the government, the
combination of cautiously restoring some of the allowances
that had been significantly cut and strong economic growth
has begun to positively impact many on the lower
socio-economic rungs and pull some of them out of poverty.
End Summary.

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Moving in the Right Direction
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2. (C) The INII poverty report covered the incomes of
Israeli individuals and families during the July 2004 to June
2005 period. It was immediately seized on by politicians and
commentators as evidence that the poverty situation in Israel
has reached crisis proportions. In reality, these poverty
statistics overall seem to indicate that things are moving in
the right direction, albeit slowly.

-- Firstly, the government's economic reform plan begun in
2003 has pulled the country out of a deep recession and moved
it onto a path of solid growth - 5.2 percent in 2005.

-- Secondly, the government has been fine-tuning its

allowance policies, restoring some of the aid that was cut to
those who were unable to join the labor force or otherwise
make up what they lost in reduced welfare payments. Overall,
Israel has significantly reduced its transfer payment to GDP
ratio in recent years, moving from 8.6 percent of GDP in 2001
to 8.5 percent in 2002 to 8 percent in 2003, 7.3 percent in
2004, and an estimated 7 percent in 2005.

-- Thirdly, some families which formerly had no breadwinner
saw one or more of their members join the workforce, as
indicated by the decrease in the number of families with no
breadwinner. The substantial decline in the unemployment
rate from 10.4 percent in 2004 to about 9 percent in 2005
played a major role in this. The enactment of the Wisconsin
employment plan in August 2005 should contribute to an
acceleration in this trend, as it helps thousands more
unemployed individuals find suitable employment. The plan
aims to place 14,000 people initially, with more to follow if
it is deemed successful.

-- Finally, the decline in the number of two or more worker
families living below the poverty line indicates that the
recent strong economic growth has begun to reach the lowest
socio-economic sector and to pull some people out of poverty.

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Statistics May Lie
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3. (U) According to Avraham Tal in the January 26 Ha'aretz,
a major factor which must be taken into account when
assessing the economic situation of various groups is the
importance of the informal economy. The statistics cited by
the INII are based on numbers supplied by the GOI's Central
Bureau of Statistics (CBS), which do not take this factor
into account. According to Tal and others' estimations, the
"black economy" comprises between twenty and forty percent of
the overall economy. He wrote that the CBS numbers also do
not take into account any income that individuals may have
other than wages, profits, or allowances, such as goods and
services they may receive at low or no cost. Therefore, he
says that the statistics the poverty discussion is based on
present a distorted and unwarranted negative picture. He
concludes by asking ". . . how reliable is the income data on
which the INII calculations are based? Is it true that
almost every fourth person in Israel deserves to be defined
as 'poor?' Wouldn't a country with a quarter of its
population considered poor look entirely different from
Israel 2006?"
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Number of Impoverished Families Stabilized
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4. (U) The INII - an agency of the Israeli government
responsible for distributing welfare payments - released a
report on January 23 covering the incomes of Israeli
individuals and families during the July 2004 to June 2005
period. The INII figures indicate a marked slowdown in the
increase in the number of families living in poverty,
totaling 20.5 percent in the 2004/2005 period versus 20.3
percent for all of 2004, 19.3 percent for 2003, and 18.1
percent for 2002. The large increases of past years
reflected the effects of the recession brought on by the
Intifada, which were likely aggravated by the cuts in
allowances enacted as part of the Netanyahu economic reform
program begun in 2003. The percentage of one-wage-earner
families living beneath the poverty line went up from 35.4
percent in 2004 to 36.9 percent in 2004/2005, but the
percentage of those with no breadwinner and living completely
on allowances went down from 35.5 percent to 34.6 percent
during the same period. The figure for families with two or
more people working but still earning less than the
government-defined poverty line went down from five percent
to 4.5 percent.

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Children Still Worse Off
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5. (U) The number of children living in poverty has
continued to rise, drawing particular attention from many
politicians interested in hyping the poverty situation in the
country. However, as with other poverty measures, the steep
annual growth in the rate of increase has tapered off
recently. According to the INII, from 1998 through 2005,
there has been a fifty percent increase in the number of
children living in poor families, from 22.8 percent in 1998,
to 29.6 percent in 2002, 33.2 percent in 2004, and 34.1
percent in the 2004 - 2005 period. The number of children
now living in poverty is 738,100. INII attributes the
increase in poverty among children to the approximately 45
percent reduction in child allowances paid out by the
government in accordance with the number of children per
family in the recent period - which resulted in a reduced
government expenditure during the period of approximately NIS
3.6 billion (about USD 783 million). On January 17, INII
announced that the child allowance, reduced to NIS 120 (about
USD 26) per month per child as part of the economic recovery
plan, would shortly be raised to NIS 148 per month (about USD
32).

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Elderly Doing Slightly Better
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6. (U) The number of elderly living in poverty seems to have
also reached a turning point, with the 24.1 percent figure
for 2004/2005 now slightly below the 24.2 percent figure for
all of 2004. Part of the reason for the slight decline in
poverty among the elderly is that, recognizing that most
elderly do not have the option of joining the labor force to
supplement their incomes, the government restored some of the
allowances that had been cut earlier - 2.5 percentage points
of the four percent reduction. The 2.5 percent was restored
in two tranches during 2005, and the impact of this move,
together with the general growth in the economy, is now
becoming evident in the declining poverty figure among the
elderly.

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The Arab Sector is Seriously Impoverished
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7. (C) The INII report suggested several ways to continue to
fight poverty. To enable more people to join the labor
market, it suggests enforcing the minimum wage, reducing the
number of foreign workers, and implementing an Earned Income
Tax Credit (EITC). It also suggested a study of the results
of the Wisconsin plan for possible future expansion, and
increased investment in vocational training. Several of its
recommendations focused specifically on the Arab sector and
suggested:

-- encouraging the establishment of small businesses,

-- providing incentives to establish industrial zones to
serve Arab towns and villages,

-- encouraging the hiring of Arabs in Jewish-owned
businesses,

-- hiring more Arabs in the public sector,

-- and encouraging Arab women to work and to open
kindergarten and day-care centers.
According to Ministry of Finance numbers, approximately 35
percent of poor Israeli households are Arab, and the Bank of
Israel (BOI) statistics for 2003 indicate that 46.2 percent
of the Arab citizens of Israel live in poverty. Whether
these numbers are accurate or not, the problem of poverty in
the Arab sector is acute, and if implemented, measures such
as these could have a large positive impact.

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Ultra-Orthodox Jews also Live in a Cycle of Poverty
-------------- --------------


8. (C) Though not specifically addressed in the INII report
or in BOI statistics, the problem of poverty is also very
serious among ultra-Orthodox Jews, known as the "Haredim."
In this community, the men traditionally study and their
wives often work to supplement the welfare payments their
families receive. As in the Arab sector, the men usually do
not serve in the Israeli army and are therefore deprived of
the entree into many job opportunities that helps many other
young men and women enter the workforce. Also in common with
the Arab community, the Haredim often have very large
families, and are dependent on child allowances and other
welfare payments. As things stand now, these families are
doomed to a cycle of poverty and the large number of such
families in the Arab and Haredi sectors explains the large
number of children living in poverty. Press reports indicate
efforts are being made to move more Haredi men away from
study and towards work, but, as with any fundamental cultural
change, this process is very slow, and its impact will not be
felt for a long time.

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Other Socio-Economic Divides in Israel
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9. (C) Other socio-economic divides exist in Israel as well,
but few statistics are easily available from official sources
to document them. Residents in development towns on the
periphery, which were largely populated by new immigrants
from the Middle East and North Africa in the years just after
the establishment of the state in 1948, are more likely to be
found on the lower end of the socio-economic scale than those
living in the major cities and towns in the center of the
country. Of the big cities, Jerusalem is the least
prosperous, with Haredim and Arabs comprising a large
percentage of its population. While the more than one
million immigrants from the former Soviet Union who came to
the country since 1990 have done surprisingly well, some of
them have not yet "made it" into the middle class. In
contrast, the Ethiopian immigrants have not fared well and
many of them live beneath the poverty line and face many
socio-economic problems. While the old Ashkenazi (European)
- Sephardi (Middle East and North African) divide in Israeli
society is becoming less relevant with every year that passes
as the Israeli melting pot continues to progress towards
becoming one coherent community, the general sense in the
country is that the Ashkenazi sector is still better off, and
that the poorer towns and cities are still largely populated
by Sephardim. Ironically, the Russian immigration is one
major factor that has brought greater prosperity to some
peripheral areas in recent years as these (generally
speaking) highly-educated new immigrants brought their
entrepreneurial skills and strong desire to succeed to areas
where housing is much cheaper than in the center of the
country.

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GOI Definition of Poverty
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10. (U) Note: The GOI defines those living beneath the
poverty line as those whose income falls below fifty percent
of median income.

-- For a single person, the poverty line is NIS 1,804 per
month (about USD 392).

-- For a family of four, it is NIS 4,618 (about USD 1000).

-- For a family of seven, it is NIS 6,854 (about USD 1490),

-- and for a family of nine, it is NIS 8,081 (about USD
1757).

-- The minimum wage is now NIS 3,335 (about USD 725), and is
scheduled to rise to NIS 3,456 (about USD 751) in April.

Therefore, even if there were strict enforcement of the
minimum wage law - which, according to all media reports that
touch on the issue - does not seem to be the case at present,
there are many people working at full-time minimum wage jobs
who are not earning nearly enough to pull their families out
of poverty. A family of four would need two full-time
workers at minimum wage jobs to bring it out of poverty. End
Note.

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Comment - Hype Cannot Conceal Progress
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11. (C) In this election season in Israel, the INII Poverty
Report has provided fodder for politicians and commentators
to hype the problem of poverty. Politicians have been making
hyperbolic statements since the issuance of the INII report.
Tal quotes the following in his Ha'aretz article:

-- "The government has turned poverty into a lethal rapacious
microbe that paralyzes the immune system." - Shas Chairman
Eli Yishai.

-- "The State of Israel has won the Poor Children's
Olympics." - Yuli Tamir, Labor.

-- "The empty bellies of Israel's children are full of a
grudge that is liable to explode in our faces." - Michael
Melchior, Labor-Meimad.

Tal concludes by saying that ". . . statistics about grinding
poverty and a report full of poor people are like a gold mine
for the rampant demagoguery, in ordinary times, and much more
so at election time." As discussed in reftel, and as noted
by Professor Ezra Sadan, former Director General of the
Ministries of Finance and Agriculture, at the Herzliya
Conference on January 24, the issue in Israel is not so much
one of poverty as of inequality - which is very disturbing to
many in a country founded on the basis of the socialist
ethos. The bottom line is that the statistics - faulty as
they might be - indicate that the situation is improving, and
that the recent economic growth which has sent those at the
top galloping ahead is also beginning to have a positive
impact on those on the bottom rungs of the socio-economic
ladder. End Comment.














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