Prime Minister Binyamin Netanyahu’s plan to raise the budget deficit target to 3
percent of gross domestic product could have disastrous consequences, Bank of
Israel Governor Stanley Fischer said Thursday.
The deficit was likely to
reach 3.5% to 4% this year, while in 2009 it rose from 0% to 5% almost instantly
due to unexpected tax revenue shortfalls, he said at the Israel Democracy
Institute’s annual Caesarea Forum at the Dead Sea . If such an event were to
occur again, he warned, the deficit could reach 7- 8%, “and we would not be able
to deal with that.”
“The last time that happened we turned to our rich
uncle for guarantees.
Today that rich uncle is less friendly,” Fischer
said, in apparent reference to the $9 billion in loan guarantees the US offered
Israel following the economic downturn in 2003. “It is not healthy for a state
that is proud of its sovereignty to turn to external actors every time there is
a problem. I would prefer that we stand on our own two feet.”
and Finance Minister Yuval Steinitz announced Tuesday their decision to double
the 2013 deficit target from 1.5% to 3%, or almost NIS 30 billion. They also
agreed to set new long-term deficit targets of 2% by 2016 and 1.5% by 2019.
Steinitz confirmed later that the budget would include some tax
Fischer urged the two to revise the budget deficit target to 2.5%
and warned that if the government failed to exercise fiscal restraint, the
central bank would struggle to restrain its monetary policy. The bank cannot set
a low interest rate in the face of expansionist fiscal policy, especially in the
long-term, as it would cause inflation and economic instability, he
Treasury budgets director Gal Hershkovitz also said the deficit
target should not rise above 2.5% of GDP, adding that such a target would be a
better match for forecast growth rates.
However, he refrained from
criticizing his boss, Steinitz, directly, saying the revised target was
reasonable, but calling for immediate clarification on how it would be
“Financial markets react quickly and painfully [to such
measures],” Hershkovitz said. “It is often pointed out that all countries are
increasing their debt-do-GDP ratios and budget deficits. But look at what is
happening to those countries and to the speed at which their financing costs
Hershkovitz spoke at a panel discussion on a report
presented by former Bank of Israel deputy governor Zvi Eckstein that outlined
three alternative budgetary policies. Policy A proposed maintaining pre-existing
fiscal policy and deficit targets. Policy B recommended maintaining present
spending restrictions and tax rates and expanding the deficit to 3.6%-3.7% in
the next five years. Policy C favored expanding government expenditure to 45% by
2016, raising taxes and keeping the deficit target at pre-existing
Current Bank of Israel Deputy Governor Karnit Flug backed
expanding the deficit target to 2.5%, saying this rate would ensure the
debt-to-GDP ratio decreases even in times of uncertainty.
budget must include permanent direct and indirect tax increases, she said,
adding that defense expenditure would also need to be reduced if other
obligations are to be met.
Prof. Manuel Trajtenberg, chairman of the
committee tasked with addressing socioeconomic problems in the wake of public
demonstrations last summer, said the government has no choice but to permanently
raise taxes, even if that means lifting the deficit target to 3%. Otherwise, he
said, it would be impossible to achieve the desired level of civilian and
defense expenditure and to invest properly in infrastructure.
also referred to the acts of violence seen at protests in Tel Aviv last week,
saying it brought back painful memories from his childhood in
“When violence in the street begins, it is like war – you know
where it starts, but you never know where it ends,” he said. “We don’t want our
children to have those memories.”
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