Fischer plans economic recommendations to new gov't

Emphasizes the need to reduce the country's debt burden as a proportion of GDP.

stanley fischer 88 (photo credit: )
stanley fischer 88
(photo credit: )
The Governor of the Bank of Israel, Professor Stanley Fischer, on Thursday said the central bank would present to the new government a series of recommendations to tackle economic policy, including social policy, measures. Speaking at a business forum at Bar-Ilan University, emphasized the importance for the next government, in particular in a period of rising uncertainty, to work towards reducing the country's debt burden as a proportion of GDP. "The debt/GDP ratio is the main factor taken into account by the rating agencies when they relate to the economy's vulnerability to shocks," Fischer said. "Israel's ratio is still at an unacceptable level, which represents the second highest burden in the budget after the defense expenditure. A reduction in the ratio will boost Israel's [credit] rating." Addressing the current state of the economy and the preferred macroeconomic policy for Israel, Fischer pointed out that although the fiscal and interest rate policy of the government and the Bank of Israel had contributed to an impressive 5.2 percent growth in 2005, the poverty rate has not started to come down. "This is a subject the new government will certainly have to address," said Fischer. Furthermore, Fischer warned that in view of the recent rise of the level of uncertainty, it was particularly important to strengthen macroeconomic policy and commit to a responsible economic policy that would encourage sustained growth while maintaining a low or falling rate of inflation. In this context, Fischer said that despite, a reduction achieved in 2005 from about 100% to 98%, the ratio of government debt to GDP was still extremely high compared to that in other OECD (Organization for Economic Cooperation and Development) countries, with a ratio of between 30% and 70%. "If the debt/GDP ratio were to fall by half to about 50%, interest payments would fall to less than 3% of GDP and less than 8% of the budget, and about NIS 17 billion a year would be available for other economic uses," Fischer said. The governor explained that since the debt/GDP ratio - an indicator of economic strength - in Israel was so high, the budget and the economy were very sensitive to interest rate changes around the world. This, in turn, affects Israel's credit rating and the interest rates that the government and the business sector have to pay in the capital markets to finance their activities. A lower debt/GDP ratio also would enable the government to operate a countercyclical fiscal policy at a time of recession. Thus, the government could increase the budget deficit - either by cutting taxes or raising expenditure - to help the economy recover. With regard to the Bank's interest rate policy for the next 12 months, Fischer said that in view of changed circumstances, partly due to geopolitical uncertainty, the maintenance of a certain interest rate differential between Israel and the US had gained importance in order to increase the economy's resilience. "It is expected that interest rates abroad will rise, and with the continued closing of the output gap in Israel, it is reasonable to assume that interest rates in Israel will rise somewhat during the remainder of the year, in order to maintain price stability," he said.