The counter-cyclical measures introduced during the global downturn are steadily being withdrawn, as the authorities gradually tighten both monetary and fiscal policy. During a previous stint as finance minister, Mr Netanyahu demonstrated a strong preference for tax cuts, privatisation and economic liberalisation. However, political, regulatory and fiscal constraints will limit his ability to push forward as fast as he would like on this particular front.

The government is proposing to reduce corporation tax by 1 percentage point to 24% in 2011 and to 20% by 2014. It was also planning to cut value-added tax (VAT) at the start of 2011 from 16% to 15.5%. But this reduction may be postponed until later in the forecast period, given the Ministry of Finance's insistence on prioritising deficit reduction.

The privatisation of the Israel Discount Bank was recently completed. However, the government will need to overcome regulatory hurdles if it is to finalise the privatisation of Bank Leumi, and it has stalled on plans to sell the postal service. The first phase of the privatisation of the ports is scheduled to begin shortly but will prove politically challenging, as will the restructuring of the politically powerful Israel Electric Corporation.

A new taxation structure for the oil and gas sector is under discussion. Energy companies have complained that the interim recommendations made by the Sheshinski Committee-which include a progressive tax on profits-could jeopardise financing for the offshore Tamar gasfield. Despite the rearguard action that is being fought by the oil firms, we expect the government to accept most of the committee's proposals.