Fischer: Maintain fiscal restraint, cut debt

Bank of Israel governor says Hirchson reforms key to further growth.

Fischer 298.88 (photo credit: Ariel Jerozolimski)
Fischer 298.88
(photo credit: Ariel Jerozolimski)
Decision makers must strive to keep budgetary spending within the defined limits and lighten the burden of government debt, Bank of Israel Governor Stanley Fischer told those gathered at the Caesarea Forum on Thursday. "If the global economy enters a slowdown or even a recession, that will influence the Israeli economy. We cannot avoid this fact. Yet, the global economy is not up to us ... and the security situation is not only up to us. Policy factors, however, are up to us," said Fischer. To build a sound macroeconomic framework that will help ensure strong and steady economic growth, "proper economic planning based, above all, on wise fiscal policy is needed," he stressed, adding that rapid growth and high tax revenues have led to "populist" demands to increase government spending. "The majority are justified," he said but noted that these voices "generally ignore the macroeconomic framework that is so important for continued growth and for tackling social and economic problems - both today and tomorrow, in the short-term and the long-term." To achieve sustainable growth, fiscal policy must continue "the strategy pursued by the government over the past three years," he said, remarking also that "the macroeconomic framework and structural reforms that the government advanced in the past few years - and those that Finance Minister [Avraham Hirchson] announced yesterday [Wednesday], from this pulpit, that he intends to advance - are also very important so that the growth will be steady and rapid." Fischer praised this week's decision by Prime Minister Ehud Olmert to set the deficit goal for 2007 at two percent of GDP, in keeping with the goal to cut the deficit to 1% of GDP by 2009 and allow government spending to grow by no more than 1.7% annually through 2010. These aims are "so important" precisely because they will allow the government to eventually increase social spending to fight poverty and address other key needs, Fischer argued. "It is important that we assist the weaker [social] strata by providing incentives for those capable of working - in particular through implementing negative income tax - and that we directly aid those unable to work, especially the elderly and disabled, through [welfare] allowances. And it is important that we aid in the development of human capital, as a long-term response to poverty, through education. But [all of these goals must be pursued] within the macroeconomic framework needed to achieve continued growth," Fischer said. "The best way to handle poverty in the long run is through economic growth, since it will create jobs and opportunities to earn higher salaries, in addition to providing the government with the resources needed to contribute its part to handling poverty," he commented. Fischer also stressed that economic analysts in Israel and abroad consistently identify the burden of debt on the Israeli GDP as "the one major weak point" of the country's economy. "When the debt is very high, like in our [country], increasing the budget deficit increases the debt at a rate and to a level that seem dangerous to the markets," Fischer explained, warning that "this situation could lead to a financial crisis - and, what's more, during a recession. And this is not a theoretical possibility. This is what happened to the Israeli economy in 2003." A lower debt also would allow the government to dedicate more resources to social spending and other needs, he said, noting that in 2005 interest payments on government debt reached NIS 33 million or 15% of the budget, "the heaviest section in the budget after defense spending." Fischer also said that, as part of efforts to join the Organization for Economic Cooperation and Development (OECD), Israel would have to adopt several international standards, including the OECD method of calculating the budget deficit. While Israel's budget deficit was 1.94% of GDP in 2005, it would have been 4.5% of GDP according to the more common method, he said. "I am not saying that this is intentional misleading. Absolutely not. There is logic to our definition as well. But the time has come to begin a process that will lead to change and bring [Israel] in line with the world in this field."