Fischer warns PM against raising budget deficit

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.”

Netanyahu 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 hikes.

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 said.

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 achieved.

“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 have soared.”

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 levels.

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.

Next year’s 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.

Trajtenberg 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 Argentina.

“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.”