BoI urges gov’t to stick to its guns

Deputy Governor Zvi Eckstein: Tax cuts aren’t the answer to price hikes

The government should reject calls for tax cuts in response to price hikes of basic goods, to preserve the budget credibility Israel has achieved in recent years, Bank of Israel Deputy Governor Zvi Eckstein said Wednesday.
“Current headlines that demand the populistic policy response of tax cuts as a reaction to the increase in prices, and the implementation of the minimum-wage increase several months early, may prejudice the credibility of fiscal policy and, therefore, should be rejected,” he said at the Herzliya Conference. “Furthermore, these measures divert the focus from real and consistent attention to the problems of social and economic gaps.”
The Histadrut labor federation is threatening to launch a general strike by February 24 unless the government accedes to its demands to lower prices and raise the minimum wage, following the rise in the price of basic goods such as fuel, bread and water.
Following a meeting with employer organizations and the Histadrut on Wednesday, which ended without any concrete results, Prime Minister Binyamin Netanyahu is expected on Thursday to announce the government’s plan for how to deal with the price rises. It is said to include tax cuts and increased subsidies for public transport fares.
Speaking at the Herzliya Conference Tuesday night, Bank of Israel Governor Stanley Fischer urged the government to adhere to a disciplined budget policy, while backing Finance Minister Yuval Steinitz, who has come under harsh attack for the price hikes.
“The government deficit increased by less than had been expected in 2009-2010, and in the next few years it is expected to maintain a downward trajectory and fall to low levels,” Fischer said. “We must not allow the government surpluses to confuse us and induce irresponsible behavior in managing the budget. We have no money to waste.
“We must avoid populism in the economic and political debate. The finance minister has done the right thing by insisting that the government stay within the budget ceiling, and the entire political system has to realize that we are in a time of uncertainty.”
Eckstein said populistic demands were largely the result of inadequate government investment in long-term treatment of the growing socioeconomic gaps.
“The treatment of the disparity issues requires consistent, multidimensional, uninterrupted and long-term attention,” he said. “A requirement for such attention is economic stability, supported by the budget credibility that Israel has attained in recent years.”
Eckstein cited the problem of widening gaps in employment, income and human capital, resulting in the fraying of social resilience and the reduction of economic growth.
“Policy should focus on increasing employment and labor income by enhancing the human capital of socioeconomically disadvantaged population groups,” he said. “To accomplish this, measures should be applied to boost these groups’ skill levels.”
The education system should focus on linguistic literacy, scientific and technological writing, computer skills, business entrepreneurship, financial markets, economics and accounting, Eckstein said.
An infrastructure should be created to help students find jobs in manufacturing, trade and public services, for example, by establishing one-stop centers for high-school graduates, he said.
Eckstein said it was important to reach the government’s employment targets, such as raising the employment rate of working-age individuals from 70 percent today to 76% by 2020, especially among Arab women and haredi men.

“As a result, the labor force will be expanded by 33,000 workers each year beyond the natural increase, and the GDP growth rate will be raised by 0.5% to 1%,” he said. “Poverty will be reduced by enabling the lowest quintile to increase its income by 10% more than the increase in the median income by 2020, thereby boosting real household income by 27% and lowering the incidence of poverty by 1 percentage point.”
Eckstein said these goals could be attained by establishing referral, training and incentivization centers for special population groups; enforcing labor laws, especially those relating to the minimum wage and the employment of undocumented foreign workers; preventing discrimination and applying affirmative action for special population groups; assuring access to academic studies for haredim and Arabs; setting up day-care centers in the Arab sector; and creating a subsidized public-transportation infrastructure geared to employment.
“The implementation of these programs, coupled with the possibility of expanding and deepening them, will set the economy on a trajectory of smaller and smaller disparities, and growth based on an increase in the employment and income of socioeconomically disadvantaged population groups,” Eckstein said.