Karnit Flug: We may use unconventional tools

Karnit Flug
Karnit Flug

"We won't hesitate to use unconventional tools," says the Bank of Israel Governor.

"There are other tools on the table, and we may have to use them," Governor of the Bank of Israel Karnit Flug said today at a press conference marking the Bank of Israel's report for 2014.

She added, "We are not eager to use unconventional tools, but if the conditions required their use emerge, we won't hesitate to do so." She emphasized, "Israel's lag in public transportation and infrastructure investments and its inconsistent bureaucracy are responsible for the relatively low productivity of the Israeli economy, in comparison with Western countries… when you look at the level of infrastructure in comparison with the developed countries, there is a significant gap between us and the developed countries in most areas, especially in transportation, particularly public transportation and ports."

Commenting on regulation, Flug said, "Every regulator does his work, but there is no overall perspective or consistency. We have fallen from 26th to 40th place, and when companies have to decide where they want to invest, the problem of bureaucracy affects their choices." Flug recommended legislation to reduce regulation and expose additional sectors to overseas competition, as well as investment in education, with an emphasis on professional education.

Referring to the possibility that Minister of Finance-designate Moshe Kahlon will try to push through a consolidation of supervisors in the financial sector, including removal of the banking supervision department from the Bank of Israel's control, Flug stated, "The experience in the most recent crisis taught us that there is a big advantage in having banking supervision within the central bank. We saw the experience of the UK, where supervision was taken away from the central bank, and then returned to it. There is no one model that fits all economies. I see a great advantage in having banking supervision within the central bank, and the lessons from the crisis point in this direction."

Flug also addressed the issue of breaking up the natural gas monopoly, saying that she was "in favor of strong regulation in the gas sector, and when there is a natural monopoly, there is also room for price controls. On the other hand, if development of the reservoirs is delayed, the damage will be great, and a balance must therefore be found that will ensure development of the reservoirs."

"Our prices are a little high"

Concerning the cost of living, Flug said, "Our prices are a little higher than what we would expect, given the per capita GDP in Israel in comparison with the rest of the world. The gap is particularly wide in food and beverages; in vehicles, where taxation is high; and in hotels and restaurants. Another area with a relatively high cost is housing (rents). Almost 40% of renters spend over 40% of their monthly income on rent, which is particularly burdensome for young couples."

Flug recommended increasing competition between existing players and removing entry barriers against additional players. In banking services, Flug cited the steps already taken by the Supervisor of Banks - making it easier to change banks, allowing the opening of bank accounts on the Internet, and setting a standard price for services.

Flug opposed the demand by Shas for a VAT exemption on basic products, saying that differential VAT is "not an effective way of dealing with income distribution. It comes with a high cost, and when products are taken out of the uniform VAT, it is a slippery slope. General price controls are also not an effective method."

"Increase the supply of land for housing"

Addressing the housing prices issue, Flug again recommended increasing the supply of land for housing. "Keep in mind that the government controls the supply of land and the planning process, and it therefore plays a key role," she said.

She noted that the planning and licensing process was too long, taking almost 13 years, and that handling of infrastructure is not conducted in tandem with the construction processes. The authorities receive negative incentives to promote construction, due to the higher property taxes for businesses and large housing units.

Concerning fiscal policy, Flug said, "3.5% of GDP is spent on servicing public debt, double what is usual in Western countries. Public civilian spending is lower than in Western countries, which is the reason for the relatively low level of these services. If the government wants to fulfill its obligations without breaching the fiscal rules, it will have to make NIS 10 billion in adjustments in the 2016 budget: NIS 2 billion in tax hikes and NIS 8 billion in spending cuts."

According to Flug, "If it becomes necessary to increase the defense budget, the government will face a difficult choice between further reduction of already inadequate public services and increasing revenues (raising taxes)." She called for consideration of eliminating tax exemptions, and warned against increasing the budget deficit.

Published by Globes [online], Israel business news - www.globes-online.com - on March 31, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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