'Palestinian statehood bid could affect Israeli economy'

BoI head Fischer advises against defense cuts to fund social reforms.

September 18, 2011 23:29
4 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)


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Bank of Israel Governor Stanley Fischer said the Palestinian drive to gain UN membership may affect the economy if it leads to unrest.

“If there is violence, that will cost us economically,” Fischer said at a press conference in Jerusalem on Sunday before departing for an International Monetary Fund meeting in Washington.

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“We all hope that it won’t come to that.”

Palestinian Authority President Mahmoud Abbas has said that later this week he will request that the UN Security Council recognize a Palestinian state and accept it as a full member, a measure that Israel and the US oppose. US officials have been working to forge a compromise that would avoid a promised US veto.

Palestinian negotiator Muhammad Shtayyeh on September 13 dismissed concerns that the US would cut more than $400 million in annual funding if the Palestinians go to the UN. He also suggested that Israeli threats to retaliate by holding back tax and customs revenue collected on behalf of the Palestinians shouldn’t be taken seriously.

Palestinian officials have repeatedly said their security forces will act to prevent any violence.

During the conference, Fischer also warned against demands to cut indirect taxes and increase the deficit in view of forecasts of slower economic growth.

“Just two years ago, the Bank of Israel report said that the budget framework for 2011-12 was internally consistent. In other words, we expect budget balance problems in 2013.

This means that if we cut taxes but keep spending unchanged, we expect a larger than planned deficit,” he said.

“This would require us to achieve 4- 5% growth to close the gap – a problem that must be dealt with. Under such a scenario, which greatly worries us, there would be very severe repercussions for the Israeli economy. We hope that these repercussions won’t happen. We have little margin and we can’t make big tax cuts; otherwise, the deficit will grow.”

Fischer added, “We’re entering difficult times for many reasons, but economically, we have the tools to enable us to successfully deal with the challenges facing us – provided that we act responsibly, and we don’t pay too high a price for international developments, and for the things that must be dealt with in the country. We have the means to do it; I’m sure of it.”

“I don’t think that the decisions of the Trajtenberg committee and the oligopoly committee will hurt the economy, even in the short term. In the long term, their decisions should contribute to the economy, and I say this without knowing what the decisions are,” he said.

As for the possible recommendation of separating both financial and nonfinancial holdings, Fischer said, “We know exactly what the repercussions of such a separation are.”

Asked about a remark that “now is not the time” to cut the fuel excise or taxes on imports, Fischer responded, “I regret if I gave the impression that it’s impossible to cut taxes. I look at the total tax revenues, and if there is a reason to cut something and raise something else, that’s fine. Cutting taxes is one way to deal with the over-concentration in the economy. I regret if this was misunderstood.”

Asked whether it is possible to cut the defense budget to finance social reforms, Fischer said, “There are other budget sources that can be used to pay for social needs... It is possible to contribute to Israeli citizens’ welfare and quality of life... The need to keep the budget framework restricts the Trajtenberg committee. I believe that it is necessary to keep the budget framework, especially now.”

He added, “We are not a normal country. If you have a defense burden like ours, it is very hard to give people other things of the kind that people in other countries receive. People must understand this sad fact.”

The Bank of Israel governor also noted that Israel was in pretty good shape, with higher growth and lower unemployment rates than in Western countries, but warned that exports were weakening, due to the slowdown in these countries.

In a broad hint to the Trajtenberg committee, he said that the economic policies, which led to Israel’s achievements in the past few years should be continued.

“The current interest and inflation rates are the results of the policies of the past eight years. We saw great change in the Israeli economy, which the S&P upgrade highlights. To keep this level, we must justify the economists’ expectations – that we should continue the economic policies of the past eight years.”

As for the second oligarchs committee, Fischer said, “As for the tycoons, I hope that they will stay rich, even if there is an economic slowdown. They have done nothing illegal, and we must not treat them as if it was criminal to do something that was legal.

That’s populism, and we must not turn the Israeli economy into populism.

To say that we will levy higher taxes on them is populism, and I am talking about us, as well as the public and the politicians.”

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