It is not every day that growth forecasts for the Israeli, or any other, economy are slashed by so much as the Bank of Israel slashed its forecast today. From a GDP growth rate of 1.5%, it now predicts negative growth of 0.2% because of cumulative domestic and international negative developments during the fourth quarter of 2008.
At least one thing is now known. This is as official as it can get that the Israeli economy is in recession. This is not news to the business sector, but at least from now on it will be possible to talk about recession in the present tense, rather than as a future event. Far more important than the official recognition of a recession are three basic questions that will greatly affect the welfare of the country's people: how long will the recession last, how will economic policies react to developments, and who will pay for it.
As for the first question - how long will the recession last - the Bank of Israel prefers to stick to the official position of the industrialized world, that the contraction will end by late 2009, and that there will be 2% growth in 2010. This latter figure still means no GDP per capita growth in Israel at all.
The Bank of Israel's working assumption is that the world will begin to recover at the times mentioned, which will strengthen domestic activity. However, for now, there is no confirmation or reinforcement that the world economy will behave as hoped, and meanwhile all we see is the continuation of the present conditions, and even a worsening of the banking sector.
The Bank of Israel's reduced growth forecast has a direct impact on the state budget, which has not even been approved, and on the projected deficit. The Bank of Israel predicts the deficit to reach 4% of GDP, which raises the possibility that Ministry of Finance officials will try to strive to prevent an expansion of the budget or the approval of any stimulus package, and will claim that it is better to let the recession play itself out over a few months.
It is also necessary to ask how the complicated fiscal situation fits in with prime minister candidate Likud chairman MK Benjamin Netanyahu's declaration that he will cut the maximum tax level to 35% if he wins the elections. Netanyahu could have said at the same time as his tax cut proposal, that Governor of the Bank of Israel Prof. Stanley Fischer will vehemently oppose it.
The issue of tax cuts is also important about who will pay for the recession. During the great slowdown of 2001-03, two finance ministers, Silvan Shalom and Benjamin Netanyahu, transferred a fairly large part of the tax burden to middle class and low-income households. The worst effects of the recession falls on these very households, compared with the effects on the wealthy, because the decline in income taxes is offset by reduced allocations.
Whether the same pattern of economic policy holds for the present recession remains an open question, and judgment can be passed only when the new government submits its 2009 budget to the new Knesset.
Published by Globes [online], Israel business news - www.globes-online.com - on January 25, 2009
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009