Standard of living in Israel drops 22.7% in 2020 - largest drop in 20 years

The standard of living in Israel dropped 22.7% in 2020, according to a new study released by the National Insurance Institute (NII).

The decline in the living standard mainly affected the middle class and constituted the largest drop in nearly 20 years, all due to the COVID-19 pandemic. At the same time, however, the Israeli economy is reportedly still resilient according to different macroeconomic data.

The middle class was reportedly hardest hit by the crisis, while the situation for the 10% at the bottom of the socioeconomic ladder improved due to financial assistance from the government. The last time Israel experienced such a dramatic and widespread drop in standard of living was during an economic recession caused by the Second Intifada terror wave in 2001.

Adjusted for all financial aid granted during the studied pandemic period, standard of living measured as disposable income fell by 4.4% in 2020. By comparison, in previous years, disposable income had risen annually by approximately 3-4%.

The official poverty line, defined in relation to median income in the NII report, was lowered to NIS 2,403 (approximately $734) per person per month, because of the dramatic decline in the standard of living in 2020. Consequently, and despite the increased poverty in absolute terms, the total number of people defined as poor paradoxically decreased slightly in relative terms to 1,980,309, compared to more than 2 million people in 2019. Children constitute almost 50% of the people defined as poor. A disproportionate number of the children defined as poor live in Israeli Arab and ultra-Orthodox Jewish households, Israel’s socioeconomically weakest population segments.

While the NII report focuses on last year, it concludes that the financial consequences of the ongoing pandemic will continue to reverberate beyond 2020. According to the report, the depth of the financial crisis will depend on the readiness of policymakers to provide a robust social safety net for the remaining duration of the coronavirus crisis. Another crucial factor will be the level of assistance for the unemployed returning to the labor market.

Meanwhile, Israel is reportedly among the least COVID-19 damaged economies in the OECD, alongside Ireland and Norway. In the third quarter of 2020, Israel’s Gross Domestic Product (GDP) increased by 39.7%, according to the Central Bureau of Statistics. Israel’s economy contracted 1.1% during the same period. Only Ireland and Norway performed better, growing 8.1% and shrinking 0.1% respectively. By comparison, the U.S. economy shrank by 2.8% and the UK economy contracted by 8.6%.

Despite the pandemic, Israel’s high-tech sector continues to thrive. The cumulative value of Israeli tech deals rose from $9.9 billion in 2019 to $15.4 billion in 2020. In another sign of confidence in Israel’s economy, the credit agency S&P retained its strong AA- rating for Israel.

The discrepancy between Israel’s robust economy and the decline in standard of living for the middle class is bewildering. One explanation is that only around 8.7% of all Israelis are employed in the successful high-tech sector.

While Israel’s macroeconomic data are still resilient, they are not felt by unemployed and furloughed Israelis, who are struggling to make ends meet.

The number of families living under poverty line rose in 2020 by almost 50% according to the Latet organization's annual Alternative Poverty Report published in December.

Further exacerbating the situation is the number of businesses filing for bankruptcy which increased by 75% in June 2020 compared to 2019, according to the Ministry of Justice. Since then, Israel has gone through two additional lockdowns, putting further economic strain on small and medium-sized businesses.