Things do not look good for the Israeli and world economies, Bank of Israel Governor Stanley Fischer told the Knesset Finance Committee Wednesday, calling on it to pass Prime Minister Binyamin Netanyahu's controversial fiscal package of tax increases and budget cuts in preparation.

"The facts are that things do not look good. There is a not small probability of a severe recession in Europe, and if that happens, it will affect us," Fischer said. "We see growth forecasts for the US of just 2 percent. Europe is in a recession, and there will be very weak recovery next year," Fischer said, predicting that Israeli exports would be weak for several years to come.

Fischer said that Israel currently pays 4% of GDP a year on interest for previously issued bonds, saying that reducing the deficit would lower this interest rate. "This amounts to about NIS 40 billion. With this money, we could do many things, which is why we must not let the interest rate rise," he said.

"If the money does not come in, we'll have to take more measures. It's very easy to say, 'it will be all right', especially before elections, but it is very responsible to deal with the problem now, especially when we're talking about a structural problem like the deficit," Fischer continued, adding emphasis to the issues of trapped profits and stricter tax collection. He warned,

Fischer criticized calls for increasing the deficit, which would leave people with a lower tax burden and provide more government benefits, saying, "we've already raised the deficit. This increases the burden on the following generations."

The 2013 deficit, he said, would reach 4.5% of GDP if taxes are not raised, and may even pass 6% thereafter.

The possibility of a split in Euro zone could lead to financial crisis, or even a "Lehman Brothers II," Fischer said. The collapse of the Lehman Brothers investment bank in 2008 sent the world economy plummeting. "The economy must be ready in advance, not afterwards. We must maintain financial stability, as well as fiscal stability and the budget."

It is better for Israel to raise taxes now, during a period of growth, than find itself in a recession, when raising taxes can further entrench a struggling economy, he said.

Labor leader Shelly Yechimovich blasted the economic plan as unjust, saying Netanyahu was uniquely and ingeniously creative at finding new ways to impose a greater tax burden on the poor and the middle class.

Yechimovich said that the tax hike falls hard on those making between NIS 9,000-42,000 per month, who she called the creative backbone of the economy.

The labor leader said that the prime minister's argument are a red herring, and that the tax mechanism is so burdensome and complex that it will take years and numerous state resources just to calculate and collect the tax.

Finance Minister Yuval Steinitz decided Tuesday to postpone the one percent rise in value-added tax by a month, following consultation with Knesset Finance Committee chairman Moshe Gafni.

VAT was supposed to rise from 16 to 17 percent on Wednesday, August 1, but the increase will now be implemented on September 1 in order to allow businesses time to prepare, the Treasury said.

The cabinet approved the VAT increase Monday as part of a series of sweeping austerity measures that it hopes will raise NIS 14-15 billion next year and reduce the budget deficit by 1.5%.

The austerity package included a 1% income tax hike for those earning NIS 8,881-41,830 per month, 2% surtax for all income above NIS 67,000 per month and across-the-board expenditure cuts.

Nadav Shemer contributed to this report.

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