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Bank of Israel Governor Stanley Fischer testified Tuesday in favor of the budget presented to the government by Finance Minister Avraham Hirchson, central bank chief of staff Gabi Fishman said, warning that the budget spending limit must be respected.
Fischer supports the 2007 budget proposed by the Treasury because growth of current spending will be limited to 1.7 percent, with the one-time costs of the war in Lebanon put in a "box" outside of the current spending, Fishman said.
In response to reports late Tuesday evening that the government might increase spending by NIS 1 billion to make room for more political concessions, Fishman said that the question was whether the amount were to be truly added - which would bring spending beyond its growth limit - or whether any "added" amount would be taken by reducing other components of the budget. Treasury figures indicate that, including the war costs, the 2007 budget would already total NIS 44.37b., some 2.6% above this year's NIS 43.26b. budget.
While changes in the composition of the budget within the current spending limit would also likely have economic impacts, the central bank was most concerned that the spending limit itself would be respected, Fishman said.
The central bank opposes the Treasury's intention of allowing the deficit to grow by as much as 3%, preferring the growth of the deficit to be capped at 2 to 2.5% with any additional funds needed being raised by lifting the VAT back up 1 percentage point to 16.5%, where it was for a year prior to June 1. Fischer's proposed temporary VAT hike would be in effect until the end of 2007.
VAT is decided by the government, not in the Knesset, facilitating any necessary hikes and reductions of its level, Fishman added.
"But this is not the most important reservation. It is more important to maintain the budget's growth limit, which is why even if our proposal is not accepted we support [the Treasury's budget proposal] in the government," said Fishman. Keeping the budget within the growth limit would allow for "a slow reduction of the debt, but a reduction nonetheless," he said.
If the presented budget is not approved, but replaced by one in which political concessions push the spending level higher, Israel's credit rating would be hurt, Fishman said, noting that rating companies issued warnings this week about Israel's high debt level.
Deterioration in the credit rating would then require the government, the private sector and Israeli households to pay more for financing, including mortgages, he added.