launched in 1995, but only to new ones introduced from the date the change is implemented. such a change would enable the realization of an important idea, which cannot be adopted as long as there are earmarked bonds : mandatory pension schemes up to a certain level of income, covering all employees and the self - employed. a superficial examination of the country ’ s support structure for the weak, elderly sections of the population also shows the need for the situation to change. mandatory pensions schemes ( without earmarked bonds! ) could provide another important layer to the meager support which old - age social security grants currently offer this low - income population. summary : the importance of an order of priorities those responsible for deciding on the extent of government expenditure and the rate of the budget deficit, from the government to the knesset ( parliament ), must balance gains and losses, the pluses and the minuses. they must have a long - term view - based on the fact that israel ’ s economy is an open one - of the trends of the budget aggregates : the tax burden, the government expenditure / gdp ratio, the budget deficit, and the government debt burden. the basic attitude should be that government expenditure can grow only if there is economic growth. no less important, however, is that there is a clear order of priorities within each of the above four components : how can the composition of tax revenues be improved over time to meet international competition, to broaden the tax base, and to reduce the inequality in the distribution of income in the economy? should the order of priorities for government expenditure be changed, both between its different elements ( e. g., current expenditure as against investment ) and within them ( e. g., focusing expenditure on education on specific geographical areas, or ages, or types ), and how can more responsibility and authority be devolved to government ministries in this field? the answers to these two questions contain great potential regarding the government ’ s contribution to economic growth. two further questions : how should the budget deficit be financed ( long - term as against short - term debt ; indexed as against unindexed debt )? how can the share of the government ’ s tradable debt vis - a - vis nontradable debt be increased? the answers to these two questions contain the key to the government ’ s contribution to financial stability in the economy. the attitude towards the trends of the aggregates and the order of priorities within them should be guided by : •

oecd, although there are countries ( france, denmark, italy, and sweden ) where it is higher than ours. distortions in the taxation of financial income despite what was said above, the main problem in israel is not so much the total tax burden as the composition of tax revenues. among the numerous subjects requiring attention in this regard ( such as the sharp rise in tax rates on labor income as the latter increases, with the top tax bracket applying at a relatively low level of income ; the heavy burden of indirect taxes ; low taxation on capital ), we will concentrate here on just one, taxation of interest income of individuals and mutual funds. the current situation suffers from the following distortions : • local - currency deposits are tax exempt ; foreign - currency deposits in israel are taxed. • savings schemes are exempt ; tradable government and private indexed bonds are taxed. • unindexed government bonds are tax free, while similar private bonds are taxed. the tax, where applicable, is 35 percent, and in some cases higher. there is thus a very grave distortion here. this situation causes serious damage to the functioning of the financial markets in the following ways : • it obliges the business sector to depend on banks as almost the sole source of finance in israel, and does not enable it to develop alternatives via the capital market. similarly it creates a preference among households for savings via banks. the tax system thus strengthens the banks ’ monopolistic hold over financial intermediation in israel. • changes in the composition of the assets portfolio, i. e., switching between local - currency and foreign - currency assets, is affected by considerations of taxes which were introduced in a period when no nis / foreign - currency market existed in israel, and which needlessly affect the exchange - rate appropriate for israel at any time. in this way one of the pillars supporting israel ’ s economic growth - foreign trade - is undermined. • the tradability of the government bond market is adversely affected as tax rules effectively exclude households from this market - another blow to the infrastructure of any advanced capital market. • the tax distortions deter foreign financial institutions from developing services for israelis, thus also impairing the financial markets in israel. these all undermine financial stability and the economy ’ s ability to withstand financial shocks, whether caused domestically or from abroad, placing an open economy such as israel ’ s at a great disadvantage. the opportunity to iron out these distortion