Growth is good, but not good enough
A senior official has hit back at Bank of Israel Governor Stanley Fischer's repeated criticism of fiscal policy.
"Fischer lacks focus. Instead of working together with us, and concentrating on the huge NIS 15 billion budget cut that has to made, which will be very hard, and maybe impossible to do, he is concentrating on raising taxes in the middle of an election campaign. How can that help now?" a top Ministry of Finance official told "Globes" in reponse to Governor of the Bank of Israel Prof. Stanley Fischer repeated sharp criticism about Israel's fiscal policy for 2013.
For three straight days, Fischer lambasted the Ministry of Finance's policy. Directly contradicting Minister of Finance Yuval Steinitz, he said that taxes would have to be raised. Fischer also said that he was uncomfortable with the current deficit, which has exceeded 4% of GDP, that the Ministry of Finance will miss the 2013 as well, predicting that it will be 3.5% of GDP rather than the 3% target, and that the spending cap should not be breached.
The content of Fischer's words was not the only unusual thing that has upset the Ministry of Finance; the frequency and harsh tone of the remarks has also played a role. Fischer launched his attack when he announced last Monday the lowering of the interest rate for January. The next day, he repeated his remarks to the Knesset, and again at an internal Bank of Israel conference on Wednesday. Taxes are what has brought relations between the two institutions to boiling point. On Monday, Fischer said that taxes would have to be raised; on Tuesday, Steinitz told “IDF Radio" (Galei Zahal) that enough taxes had been levied and that there was no need for more; and, just hours later, Fischer repeated his remarks that tax hikes were needed.
"The cut, the most important fiscal event of 2013, will be difficult and a lot of blood will be spilled," said the senior Ministry of Finance. "Let's assume that we will need the additional NIS 3-4 billion in taxes that Fischer mentions, which is not at all certain, but let's assume it. So with one or two measures - you know that they are (VAT hike and/or one percentage point hike on income taxes, A.F.) - we could solve this, but there is no one or two measures on the spending side which will cut NIS 15 billion! Even Fischer agrees that this is the most important thing, but why talk about tax hikes now?"
The Bank of Israel declined to respond to the remarks.
A source at Steinitz's office tried to douse the flames, saying, "There are situations in which everyone is pulling in their own directions, but there is no tension. Moreover, the Ministry of Finance is very pleased that Fischer updated his growth forecast in line with Steinitz's statement. There is no war, or even something unusual. There is a specific disagreement.
Both the Bank of Israel and Ministry of Finance revised their 2013 growth forecasts in line with the Central Bureau of Statistics instructions for calculating gas revenues for calculating GDP. Fischer has repeatedly said that the actual growth rate is slowing, and that a 2.8% growth forecast should be used for setting policy, and any addition to GDP from gas discoveries will not improve employment of tax revenues at this time.
Fischer is very, very worried
Fischer is most worried about the budget. "He is very, very worried," said an analyst present at the Bank of Israel's forecasters' meeting last Thursday. The quarterly meeting is held with top capital market economists. The analyst added, "The governor is disappointed. He has hinted that as far as fiscal policy is concerned, the government does not listen to him, does not hear him, does not consider him, and does not express his opinions. He seems very disappointed and even angry."
Relations between the Bank of Israel and the Ministry of Finance have been relatively calm for several years. The last incident between them occurred in August, over the defense budget, when Fischer unexpectedly supported the Ministry of Defense. "Fischer caused us a lot of damage," said a top Ministry of Finance official at the time. "He talks about budget cuts and the importance of fiscal responsibility, but when he faces generals, he melts," one official told "Globes" the following day.
However, Fischer has not taken the defense budget off the hook. "It is not recommended to postpone these decisions (budget cuts and tax hikes, A.F.). Tensions within the government only increase as elections recede, and it's better to make these decisions at the start of the government's term. We should remember that we may face security challenges, and it's the government's paramount responsibility to protect its people," said Fischer in his latest speeches.
Published by Globes [online], Israel business news - www.globes-online.com - on December 30, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012
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