Fischer warns against large deficits

The Bank of Israel Governor says the deficit is expected to rise to 6% of GDP.

Stn Fischer good 88 248 (photo credit: Ariel Jerozolimski)
Stn Fischer good 88 248
(photo credit: Ariel Jerozolimski)
Israel cannot finance large deficits, and the government must maintain fiscal discipline to keep public debt in check, Bank of Israel Governor Stanley Fischer said Tuesday. "We need a fiscal rule that makes economic sense," he said at the Fiscal Frameworks for Israel conference in Jerusalem sponsored by the International Monetary Fund. "It is obvious that the fiscal rule of 1.7 percent of GDP cannot continue forever because it does not analyze public expenditure efficiently. The focus on spending constraints is not enough. "The deficit is to rise significantly more than expected. Israel's debt-to-GDP is still relatively high and problematic. Therefore we need to run small deficits and let the debt-to-GDP ratio come down." Also speaking at the conference, Manuel Trajtenberg, head of the National Economic Council at the Prime Minister's Office, said sticking to the 1.7% fiscal rule was untenable. "The political establishment does not want to put up with it anymore," he said. Fischer said the deficit was expected to rise to 6% of GDP. He warned that a higher deficit of 6.5% to 7% would become problematic to finance, adding that Israel could not afford a large expansionary stimulus package. "We are now running large deficits and some people are asking why we are not making them even bigger, as other countries," he said. "The answer is simply that we have no way of financing them." Fischer said the government should implement measures to encourage employment and economic activity that do not push the budget deficit higher. Finance Ministry Director-General Yarom Ariav stressed the importance of fiscal rules and adherence to the government's expenditure ceiling of 1.7%. "Given the political and social characteristics of the Israeli society, which means that each group and each minister is pressing for their own specific needs, there is a lot of pressure on the budget," he said. "Fiscal rules in Israel are very important. In fact, they are a must because of Israel's unique social and political characteristics. The most important achievement of maintaining fiscal targets is the greater awareness for the need of fiscal and budget discipline among politicians. With all the government changes in Israel, and there have been many, every new government begins to adopt fiscal discipline, which is a real achievement." Bloomberg contributed to this report.