Fischer: Don’t forget about the poor

In annual report, BOI chief stresses fiscal balance, housing reforms, urges creation of sovereign wealth fund for natural gas.

Fischer and Peres 370 (photo credit: Mark Neiman/GPO)
Fischer and Peres 370
(photo credit: Mark Neiman/GPO)
Though focusing on helping the middle class is important, Israel should not forget about its poor, Bank of Israel Gov. Stanley Fischer said Tuesday, as he presented the final annual report of his tenure, which will end in June.
“We’re talking a lot today about the middle class, but it is no less important to also speak about the poor in society and how they, too, can benefit from the growth in the economy,” Fischer said as he presented the report to President Shimon Peres.
A 2012 report by the bank estimated that while 26.6 percent of the population was middle class and 22% was upper middle class, a whopping 40.7% were in a low economic class.
Fischer’s comment follows a political backlash against Finance Minister Yair Lapid for framing the middle class around an archetype called Mrs. Ricki Cohen, who, together with her husband, bring in NIS 20,000 a month, an income level that is solidly upper middle class.
Yet Fischer also praised Lapid, calling him a serious man and lauding his commitment to tame the country’s deficit.
“They say that you have only one chance to make a first impression. The first impression was excellent,” he said of his meetings with the new finance minister.
In introducing the report, which he submitted to Peres, Lapid and Prime Minister Binyamin Netanyahu, Fischer noted that Israel’s macroeconomic situation was relatively good: The economy was projected to grow 3.8% this year, on par with the world average, unemployment was at a historically low level of 6.5%, and inflation, at 1.5%, was well within the target.
“The main problem in the Israeli economy is the budget,” Fischer said, explaining that overspending during periods of growth will leave the government little leeway for stimulus should recession hit.
With the economy functioning near full employment, he said, the government cannot hope that a surge in the economy will help fill the budgetary hole with extra taxes. The country, he said, has to make the tough decisions now, otherwise the deficit could swell to 6.5% of GDP, raising the country’s debt level to 95% of GDP by the end of the decade, a situation that he said would be “simply unacceptable.”
Though the deficit target is set at 3%, the bank projected that it would reach 3.6% in 2013.
Asked whether Israelis should expect more tax increases, Fischer said that it would be irresponsible to overburden the economy with taxes, though some increases seemed likely.
The defense budget will likely be among the biggest obstacle in the budget process.
“Without very significant cuts in this area, it will be very difficult not to raise taxes,” Fischer said.
High debt is more problematic for Israel than other countries because of its precarious security situation and its history of high interest rates, which drive up the risk premium it pays on debt.
Israel spends 3.9% of GDP on interest payments, he said, around double the OECD average and about two-thirds of the percentage it spends on defense.
Turning to Israel’s natural gas, which began flowing over the weekend from the Tamar field and is expected to add a full percentage point of economic growth in 2013, Fischer urged the government to create a sovereign wealth fund as soon as possible to properly manage the revenues.
Without such a fund to invest the earnings abroad, there is danger that the rapid inflows would strengthen the shekel, making exports less competitive on the world market and ultimately hurting the real economy.
Economists call this phenomenon “Dutch disease,” after a natural gas find in the Netherlands in the 1960s had the same effect. With the shekel already soaring at 3.63 to the dollar, the worry is particularly acute.
“We can’t use all the money from this natural gift for the current generation and the next generation, but for future generations,” Fischer said.
On housing, Fischer repeated his conclusion that additional supply was needed to bring down prices, which grew 5.5% in real terms in 2012 after a cumulative 40% increase in the four prior years.
He also urged reforms to the lengthy, bureaucratic process for building. After a builder chooses a piece of land, it takes five years on average to get through the approval process, he said, noting that it took an Israeli company only two years to build a hotel in Singapore, start to finish.
Government efforts to reduce the red tape have produced few tangible results.
Finally, Fischer said, the financial system should coordinate its regulations through a new financial stability committee, to ensure that Israel does not self-inflict a financial economic wound the way Iceland, Ireland and Cyprus have.
Each of those countries, he noted, had banking sectors many times larger than their annual economic output.
Fischer cited an IMF Financial Sector Assessment Program report on Israel, which stated: “Financial institutions and their clients are challenged by the complexity of regulations, and relatively frequent changes. It may be worth undertaking a mediumterm project to streamline and systematize legislation and regulations.”
When asked if he had provided any input as to who should replace him, Fischer replied, “I’m sure the next governor will be a good governor.”