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(photo credit: Ariel Jerozolimski)
Bank of Israel Governor Stanley Fischer warned on Thursday that planned government spending of billions of shekels, if not cut, could jeopardize the government's ability to preserve budget discipline and significantly harm the country's economy.
"As economic adviser to the government, I felt almost no need in the past two years to talk about the government's budget policy, as I was sure that the path we were on was the right one. But, today, I see signs that raise some question marks over the government's ability to continue along this route, and this is most undesirable," Fischer said at the Forum Caesarea organized by the Israel Democracy Institute. "In preparation for the 2008 budget, new decisions were taken - most of them by the government and not as a result of private legislation. With respect to just 2008, these decisions involve an increase in spending of more than three-fold than that allowed by the set ceiling on expenditure."
He added that there were also several decisions in the pipeline that would increase payments to Holocaust survivors, old-age allowances, defense of settlements in the South, lowering class sizes, etc., all of which also would boost government spending.
"If the Israeli economy wants to continue thriving similar to current levels, it must continue to stick to its budgetary discipline, otherwise we will be paying a very high price over the next five to 10 years. We could find ourselves without the sufficient funds to promote the economy and to deal with Israel's future problems, whether in defense, education or welfare," said Fischer. "To cope with this situation, a decision should be taken, as soon as possible, to cut government expenditure now in the current year to sustain growth."
Also speaking at the conference, Koby Haber, the Finance Ministry's budget supervisor, warned that the government could soon be getting into a situation in which it could not hold true to its promises.
"We need to urgently sit down and commence preparation for the 2008 state budget with or without a Finance Minister," he said.
Fischer indicated that Israel must keep to its 1.7 percent budget growth target in 2008 and continue to reduce the size of its budget relative to gross domestic product.
"It is clear to everyone that the government in Israel is too big. In recent years, though, the government has gone far in reducing this size but we have not yet reached the end of that path," he said.
Spending by general government (that is government, local government and other bodies) has fallen as a proportion of GDP from 52% in 2002 to 47% in 2006.
At the same time, Fischer emphasized the importance of reducing the burden of government debt as a proportion of GDP to minimize the effects of possible external shocks and high interest payments on debt.
"Although we have managed to scale this down from 102% in 2003 to 88% in 2006, this ratio is still too high when in most OECD countries the ratio ranges between 30% and 70%," said Fischer.
In 2006 these interest payments reached some NIS 30 billion, which is 13% of the government's budget, the largest single item on the budget after defense spending.
"This year, interest payments on debt reached NIS 35b. and in 2008 they are expected to reach NIS 34b.," Haber noted.