Stanley Fischer upclose 88 248.
(photo credit: Ariel Jerozolimski [file])
Bank of Israel Governor Prof. Stanley Fischer on Tuesday unveiled an NIS 4.4 billion economic emergency plan to combat the effects of a deepening recession as the central bank revised its growth forecast down for a second time this year to a record low of -1.5%.
"The plan in terms of its cost is relatively modest. We are in a situation in which we don't have much flexibility in terms of current expenses in light of a growing deficit. As it is, even if the government keeps its spending ceiling of 1.7 percent of GDP the deficit will reach more than 5% of GDP as tax revenues continue to fall," said Fischer at a press conference on Tuesday. "It is part of our role as the economic advisor of the government to make recommendations. We are in an extraordinary situation because of the uncertainty in the public about where the economy is moving and the steps that need to be taken, while at the same time a new government is shaping up. For these reasons we decided to make the proposals public."
Similar to the Finance Ministry's stimulus plan presented a couple of months ago, the central bank's stimulus proposals seek to stem negative growth, long-term unemployment and poverty. In practice, the plan recommends to the new government that infrastructure spending, in particular for roads and railways be sped up, negative income tax be implemented this year, existing employment programs be extended, the period of eligibility for unemployment benefits be expanded, and that the government assist factories in the periphery in risk of collapse.
Out of the NIS 4.4b. budgeted for the rescue measures NIS 1.5b. will be allocated for special infrastructure and education projects, NIS 1.1b. will be spent on measures to bolster industry and exports including an NIS 600,000 addition to the Chief Scientist's budget, and another NIS 1.8b. budgeted to assist the labor market. The central bank said that the implementation of the plan would prevent 4,000 families from falling into poverty and reduce the number of unemployed by 15,000 people.
Presenting the plan, Karnit Flug, director of the central bank's research division, said that the latest figures by the Central Bureau of Statistics suggested that the economy was in a recession.
"In view of much weaker fourth-quarter world trade data and estimates of slower than expected global trade in 2009, we cut this year's growth forecast to negative growth of 1.5% from - 0.2% in January," said Flug. "Business sector growth is expected to contract by 2.5% in 2009 compared with positive growth of 4.3% in 2008, while private consumption is set to contract by 0.5% compared with growth of 3.6% last year."
The central bank said that the economy was forecasted to contract by 1.1% should the new government adopt its economic stimulus plan. As a result of the additional spending resulting from the package, the budget deficit is set to reach 5.8% of GDP this year, compared to a forecast of 5.2% of GDP without the stimulus plan.
At the same time, the Bank of Israel warned again against cutting taxes, a measure that prime minister-designate Binyamin Netanyahu has said he will implement.
"Lowering taxes as the deficit grows is highly problematic," said Flug.
Furthermore, the central bank recommended that tax cuts planned for 2010 - at a cost of some NIS 2.5b - be postponed should the deficit grow more than forecast. In addition, Fischer called on the new government to reach an agreement on putting a freeze on planned pay rises in the public sector.
"The plan takes into account measures to deal with a growing deficit, a fall in tax revenues and slowing growth but what is missing are recommendations in which areas of the state budget cuts need to be undertaken," said Roby Nathanson, director of the Macro Center for Political Economics. "The plan is no more than an expansion of an existing plan. Finally although the plan succeeds in offering wider measures to cope with unemployment, it does not deal with the source of the unemployment in an immediate and comprehensive way and does not offer a real solution for factories on the verge of collapse."
The Histadrut Labor Federation and employers' organizations welcomed the central bank's plan to combat the unemployment crisis and implement a negative income tax policy to boost consumption but opposed any plans to freeze public sector wages.
"We welcome the direction of the governor requiring the government to endorse a plan to pump more money into the economy, in an effort to cope with the problem of unemployment," said Histadrut Labor Federation chairman Ofer Eini. "I hope that the new government will go in the same direction and that Netanyahu will take up this position once he comes into office and together with the Histadrut and employers we will formulate an agreed economic plan."
According to the central bank's revised outlook, the adoption of the stimulus plan will moderate this year's expected rise in the rate of unemployment by 0.5% to 7.5% from a forecast of 7.8% if it is not implemented compared with an unemployment rate of 6.1% in 2008. Without the bank's plan some 70,000 people are expected to lose their jobs this year bringing the total number of unemployed to 250,000.
Over recent months an array of companies across all sectors of the economy have continued to lay off thousands of employees. In the first days of March alone more than 10,000 job-seekers signed up at the Israel National Employment Service.
Meanwhile the Israel Manufacturers' Association reported on Tuesday that in the fourth quarter of last year, 2,370 workers were fired from tens of factories and companies in the industrial sector. During the same period, 1,200 new workers were hired mainly in the food and beverage sector, chemicals sector, electronic communications equipment sector, machines and equipment sector and medical supervision equipment sector.
Overall employment in the industrial sector declined by 0.3% in the fourth quarter of 2008 compared with a drop of 0.1% in the preceding quarter and 0.2% in the second quarter of 2008. At the same time, the figures released by the economics division of the association, showed that the number of work hours in the sector fell 1.5% in the quarter.
In its revised forecast, the Bank of Israel expects the volume of export to drop by 11% in 2009.