Though focusing on helping the middle class is important, Israel should not
forget about its poor, Bank of Israel Gov. Stanley Fischer said Tuesday, as he
presented the final annual report of his tenure, which will end in
“We’re talking a lot today about the middle class, but it is no
less important to also speak about the poor in society and how they, too, can
benefit from the growth in the economy,” Fischer said as he presented the report
to President Shimon Peres.
A 2012 report by the bank estimated that while
26.6 percent of the population was middle class and 22% was upper middle class,
a whopping 40.7% were in a low economic class.
Fischer’s comment follows
a political backlash against Finance Minister Yair Lapid for framing the middle
class around an archetype called Mrs. Ricki Cohen, who, together with her
husband, bring in NIS 20,000 a month, an income level that is solidly upper
Yet Fischer also praised Lapid, calling him a serious man
and lauding his commitment to tame the country’s deficit.
“They say that
you have only one chance to make a first impression. The first impression was
excellent,” he said of his meetings with the new finance minister.
introducing the report, which he submitted to Peres, Lapid and Prime Minister
Binyamin Netanyahu, Fischer noted that Israel’s macroeconomic situation was
relatively good: The economy was projected to grow 3.8% this year, on par with
the world average, unemployment was at a historically low level of 6.5%, and
inflation, at 1.5%, was well within the target.
“The main problem in the
Israeli economy is the budget,” Fischer said, explaining that overspending
during periods of growth will leave the government little leeway for stimulus
should recession hit.
With the economy functioning near full employment,
he said, the government cannot hope that a surge in the economy will help fill
the budgetary hole with extra taxes. The country, he said, has to make the tough
decisions now, otherwise the deficit could swell to 6.5% of GDP, raising the
country’s debt level to 95% of GDP by the end of the decade, a situation that he
said would be “simply unacceptable.”
Though the deficit target is set at
3%, the bank projected that it would reach 3.6% in 2013.
Asked whether Israelis should expect
more tax increases, Fischer said that it would be irresponsible to overburden
the economy with taxes, though some increases seemed likely.
budget will likely be among the biggest obstacle in the budget
“Without very significant cuts in this area, it will be very
difficult not to raise taxes,” Fischer said.
High debt is more
problematic for Israel than other countries because of its precarious security
situation and its history of high interest rates, which drive up the risk
premium it pays on debt.
Israel spends 3.9% of GDP on interest payments,
he said, around double the OECD average and about two-thirds of the percentage
it spends on defense.
Turning to Israel’s natural gas, which began
flowing over the weekend from the Tamar field and is expected to add a full
percentage point of economic growth in 2013, Fischer urged the government to
create a sovereign wealth fund as soon as possible to properly manage the
Without such a fund to invest the earnings abroad, there is
danger that the rapid inflows would strengthen the shekel, making exports less
competitive on the world market and ultimately hurting the real
Economists call this phenomenon “Dutch disease,” after a natural
gas find in the Netherlands in the 1960s had the same effect. With the shekel
already soaring at 3.63 to the dollar, the worry is particularly
“We can’t use all the money from this natural gift for the current
generation and the next generation, but for future generations,” Fischer
On housing, Fischer repeated his conclusion that additional supply
was needed to bring down prices, which grew 5.5% in real terms in 2012 after a
cumulative 40% increase in the four prior years.
He also urged reforms to
the lengthy, bureaucratic process for building. After a builder chooses a piece
of land, it takes five years on average to get through the approval process, he
said, noting that it took an Israeli company only two years to build a hotel in
Singapore, start to finish.
Government efforts to reduce the red tape
have produced few tangible results.
Finally, Fischer said, the financial
system should coordinate its regulations through a new financial stability
committee, to ensure that Israel does not self-inflict a financial economic
wound the way Iceland, Ireland and Cyprus have.
Each of those countries,
he noted, had banking sectors many times larger than their annual economic
Fischer cited an IMF Financial Sector Assessment Program report
on Israel, which stated: “Financial institutions and their clients are
challenged by the complexity of regulations, and relatively frequent changes. It
may be worth undertaking a mediumterm project to streamline and systematize
legislation and regulations.”
When asked if he had provided any input as
to who should replace him, Fischer replied, “I’m sure the next governor will be
a good governor.”