Fischer’s unheeded warning

In a speech last month at the Bible Lands Museum in the capital, Fischer, who probably had already decided to step down early, predicted that the incoming government “will not have an easy time in the near future.”

January 30, 2013 23:40
3 minute read.
Bank of Israel Governor Stanley Fischer following his resignation, January 30, 2013.

Bank of Israel Governor Stanley Fischer resigns 370. (photo credit: Sasson Tiram)


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Stanley Fischer’s announcement that he would be leaving in the middle of his second five-year term as governor of the Bank of Israel was not exactly a surprise. He warned Prime Minister Binyamin Netanyahu and Finance Minister Yuval Steiniz that he might not finish his second round as governor. And about a year ago he even eyed the position of chairman at the International Monetary Fund, before he was disqualified due to his age. Fischer is now 69 years old.

Fischer’s announcement comes at a particularly inconvenient time.

The passage of the 2013 state budget, which was delayed while the nation went into election mode to choose a new government, is now perhaps the most pressing challenge we face – at least domestically.

After a series of miscalculations and readjustments, which can be partly blamed on forecasts made too far in advance as part of the two-year budge regime instituted in July 2009, the Treasury is in turmoil.

Officials in the Treasury were overly optimistic about both state revenue from taxes and the budget deficit.

As a result, we face a 2012 fiscal deficit of close to NIS 40 billion, which is 4.2 percent of GDP. There is real danger of a rerun of the fiscal crisis of 2002 to 2003.

Unless steps are taken to rein in the deficit, our credit rating will downgraded, making it more expensive to service our loans, though judging from a $2 billion bond float earlier this year made at record low interest rates, including the first 30-year bond offering in more than a decade, such a gloomy prognosis is still premature.

Netanyahu’s rationale for delaying the passage of the budget until after the campaign was that none of the political parties would be willing to vote in unpopular budget cuts, austerity measures or tax hikes in an election year. And that reasoning was sound.

But now the prime minister faces a different challenge: The Likud, humbled in the election, is weaker and more subject to pressure from coalition partners.

It is possible that Yisrael Beytenu’s 11 MKs could break, or threaten to break, from the Likud, leaving it with just 20 MKs – only one more than Yair Lapid’s Yesh Atid.

Under the circumstances, it is somewhat reassuring that Fischer will remain at the helm of the Bank of Israel until June. By then the 2013-2014 budget will be passed.

Judging by the way past warnings made by Fischer were practically ignored, however, there is no guarantee that future warnings will be heeded. In fact, Fischer’s impotence in the face of a growing budget deficit might have something to do with his decision to cut short his second term.

As early as last March, when Netanyahu came under pressure to increase the defense budget in the wake of the Arab Spring, Fischer went public with warnings against increasing the budget deficit.

Speaking at the Israel Democracy Institute’s annual Caesarea Forum for Economic Policy at the Dead Sea in June, shortly after Netanyahu decided to raise the 2013 budget deficit limit from 1.5% of GDP to 3%, Fischer warned that such a move could have “disastrous consequences.”

He also noted that since the economy was in good shape and unemployment was low, the budget deficit was “structural, not cyclical.”

In other words, besides narrow political considerations of popularity, there was absolutely no justification for allowing the deficit to get out of hand. “The markets don’t accept political excuses,” Fischer added.

Unfortunately, he was a Jeremiah figure whose prophecies of impending doom were ignored. Despite Fischer’s numerous public warnings, which must have followed warnings made in private, Netanyahu and Steinitz allowed the budget deficit to grow.

In a speech last month at the Bible Lands Museum in the capital, Fischer, who probably had already decided to step down early, predicted that the incoming government “will not have an easy time in the near future.”

We can only hope that after ignoring Fischer for too long, our next government will take heed – before it is too late.

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