Ariav: Passing 2009 budget still top priority for economy

Finance Ministry's director-general tells 'Post' he's confident Israeli economy can weather global crisis with minimum damage.

Ariav 224.88 (photo credit: Ariel Jerozolimski [file])
Ariav 224.88
(photo credit: Ariel Jerozolimski [file])
The Finance Ministry is soon expected to unveil a multi-billion economic stimulus package, but the approval of the state budget for 2009 remains a priority to help the economy cope with a looming recession in the global economy. "Clearly not passing the state budget for 2009 is not good for the economy, and its approval is one of our main priorities in coping with the global financial and economic crisis," said Finance Ministry's director-general Yarom Ariav in an interview with The Jerusalem Post. Nonetheless, Ariav is confident that the Israeli economy is in a better position than those of other countries to weather the global crisis with minimum damage. "All indicators show that we are entering this crisis in a good condition. The economy has grown over 5 percent on average over that past few years; unemployment and external debt have come down. We have a good balance of payments, and budget discipline has been kept under control," said Ariav. "The global crisis started as a financial crisis, and we have been lucky that the first wave of the crisis was not made in Israel as in previous crises," he went on. "The local banking sector has learned from previous crises and has not engaged in complicated financial instruments. Fierce regulation has made the banks more resistant." But the Finance Ministry is well aware that the second wave, the crisis in the real economy, is already with us. The Treasury has not yet updated its growth forecast of 3.5% for 2009 in light of the lack of an approved state budget and is waiting to collect additional economic indicators. But unofficial estimates in the Treasury forecast growth of below 3%. Meanwhile, the Bank of Israel lowered its growth forecast for 2009 from 3.1% to 2.7% and is expected to further cut the outlook. In recent weeks pressure has been mounting on the Treasury to intervene in the market and economy to ease the effects of the global economic crisis as local companies have started to cut their workforces and exporters are suffering from a downturn in demand. "It is clear that our growth forecast of 3.5% on which the budget [for] 2009 is based is too high. But we have not yet reduced our outlook. On the one hand, there is a vast lack of certainty over the extent of the economic crisis, while on the other hand, the economic forecast models that were used are not doing the work anymore as we have seen," said Ariav. "Economic growth will start to substantially slow down, and we are determined to act to reduce the impact of the crisis on the domestic market. Here, there is room for some form of government intervention to mitigate the damage of the crisis through investment in infrastructure, while strengthening the basic structure of the economy," he said. The Finance Ministry intends to implement an economic stimulus package rather than a rescue package. This week the principles of the multi-billion stimulus package have been approved by outgoing Prime Minister Ehud Olmert. The program will now be presented to the socioeconomic cabinet, after which relevant parts of the package will be presented to the Knesset Finance Committee for approval before it is unveiled to the public. "We don't need a rescue package," said Ariav. "What the government can do now is to bring infrastructure projects forward and ensure credit availability for small and medium-sized businesses. The plan is to rescue the real economy from the ravages of the international financial crisis, but we see no reason at this stage for government intervention in the capital market." Ariav added that generally the public has been showing maturity and responsibility in its behavior toward savings vehicles. "Long-term savings vehicles such as provident and pension funds had initially suffered from heavy withdrawals as the financial crisis mounted worldwide, but the outflow has slowed significantly in recent weeks and long-term assets are being kept by the public," said Ariav. In addition, Finance Minister Ronnie Bar-On is examining measures to ease conditions on value-added tax payments in an effort to ease liquidity difficulties and keep the economy from falling into a recession. One of the measures under consideration is to collect VAT payments from businesses once payment of the transaction is actually received rather than on a regular basis at the end of the month. Another measure under review is to implement differential VAT rates instead of the current uniform 15.5% VAT rate levied on all goods and services. In an effort to bolster private consumption, VAT might be cut on certain basic items such as food products. Much discussion in recent weeks has also centered around the question whether the Finance Ministry will be able to go ahead with its multi-year tax plan in light of the expected slowdown in tax receipts, and thus government revenues, and the cost of the multi-billion economic stimulus package, which will in turn result in a larger government deficit. "We will continue to apply the multi-year tax-cutting program as planned despite the expected fall in tax receipts in 2009 due to the slowdown in the growth rate of the economy," said Ariav. "Cutting the tax rates for companies and individuals are measures to encourage economic growth. I believe that our economy and business sector is much better in knowing how to manage risk and crisis situations and will be seeking to turn this situation into opportunities." Under the multi-year tax reform, the maximum income tax rate will be reduced gradually from 49% to 46% in 2009 and 44% in 2010, and the maximum corporate tax rate will be cut from 34% to 26% in 2009 and 25% in 2010. Over the past year, Ariav has been heading the so-called "Ariav committee" for capital market reform, which among others was seeking tax exemptions across the board for new immigrants, returning Israelis and foreign investors to create a financial center with a competitive tax structure for finance professionals and to catalyze the export of financial services. Ariav's goal was to turn Israel into one of the 10 leading financial markets within 10 years and boost the financial sector to 10% of gross domestic product from the current 4%. "In light of the financial and economic crisis, we have decided to work on a lower profile and put the fund reforms on hold. The whole global financial system is out of balance, as are we, so we need to wait and see until we have more clarity," said Ariav. "What we need to do now is to focus our resources on coping with the global economic crisis."