Fischer: We wanted to give growth a push

"If we go into recession, the deficit will rise to 6-7% of GDP, and then the government will have financing difficulties."

December 25, 2012 21:38
4 minute read.
Bank of Israel Governor Stanley Fischer

Stanley Fischer 311 R. (photo credit: REUTERS/Baz Ratner)


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“Following the new Bank of Israel Law, today we are working in a much better decision-making framework at the bank, both for interest-rate decisions and for administrative decisions, which are no less important, because we have the Supervisory Council headed by Dan Propper,” Bank of Israel Governor Stanley Fischer said Tuesday at a Knesset Finance Committee session discussing the central bank’s budget for 2013. “I see how important it that someone keeps a check on us from outside, and I see the effect it has on us.”

Interest rate

During the session, Fischer commented for the first time on Monday’s surprise decision to cut the central bank’s interest rate by 0.25 percent to 1.75%.

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“We are seeing a slowdown, though not great, in economic growth, industrial output and in exports, which are not growing rapidly,” he said. “We don’t see ourselves getting into a recession, but to encourage demand we lowered the interest rate. We want to give a push to growth, and that is what we did.”

Although Fischer ruled out the word recession, he warned: “For nearly a decade we have been among the leaders for growth in the Western world, and we must continue that way. But at present we are close to full employment, and we have a deficit around 4% of GDP that’s very high.

“If we do go into recession, the deficit will rise to 6% to 7% of GDP, and then the government will have financing difficulties.

Then it will be much harder to take the necessary steps on the budget, and so it will be preferable to take them straight after the elections.”

Fiscal deficit

Regarding the fiscal deficit that the next government will have to deal with, Fischer said: “According to the spending ceiling, we will be about NIS 15 billion above the ceiling permitted to the government.

It’s hard to cut an amount like that, and it may be necessary to raise taxes.

“There’s a big problem here, and it won’t be easy. It was very important that they decided on a tax hike beforehand, because otherwise they would not be able to raise them this year. The action taken in 2003 was very tough, but on that basis we were able to grow rapidly until the great [financial] crisis and to get through the great crisis in better shape.”

Growth forecast

Fischer explained why the Bank of Israel rose its growth forecast.

“The change in our growth forecast for the coming year has two bases,” he said.

“One is what happens to the economy without gas. Here, we see a slight decline in growth, from 3% to 2.8%. This is a continuation of a gradual fall in the rate of growth, and we don’t know when this will end.

“The second basis is the inclusion of gas production in GDP. The result is that this boosts growth to 3.8% next year.

You have to understand that this 1% GDP rise is based on a small number of people who operate the drilling platforms.

It’s not a matter of very many workers. This won’t affect employment in the short term in the way that 1% of GDP generally affects employment. It’s not like regular growth.”

World economy

Fischer expressed pessimism about the world economy.

“It’s clear that the Europeans have convinced us that they will do everything to ensure that the euro doesn’t break up,” he said. “But meanwhile, the European economy has entered a recession.

Not a huge recession, but a recession.

In addition, we are waiting to see what happens with the US and the fiscal cliff. Meanwhile, the global economy is problematic, the volume of world trade has fallen, and that is not good for the Israeli economy.”

Housing market

Fischer discussed fears that the low interest rate might heat up the housing market even more.

“As long as we build at a rate of 40,000 housing units a year, the situation is reasonable. In the third quarter of 2012, we fell to a pace of only 8,000 units, and at an annual rate, that works out at just 32,000 housing units, and that’s low. We need to work on the supply side. It isn’t that the government hasn’t tried. There were reforms and attempts, but it hasn’t yet succeeded, and we need to persist with it.”

Renovation, new banknotes

Renovation of the main building for NIS 177 million and the printing of a series of new banknotes at a cost of NIS 150m. enlarged the budget of the Bank of Israel for 2013 to over NIS 1 billion, the Knesset Finance Committee was told.

The Bank of Israel claims that excluding the renovation plan and the banknote printing, two one-time items that have not actually been budgeted but are recorded as “permissions to commit,” the budget was actually cut by 5% and amounts to NIS 731m., compared with NIS 740m. for 2012. In 2010, the central bank’s budget was only NIS 612m.

The central bank also said the renovation work would take at least four years, and the tenders will only begin in 2013, so the actual work will start only in 2014. For the first time, the Bank of Israel budget presented to the public does not include salaries for retirees.

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