We learned two things at the press conference held today by Governor of the Bank of Israel Stanley Fischer and the director of the bank's Research Department, Karnit Flug.
The first is that the Israeli economy is in a worse situation that had been foreseen, and that if the right steps are not taken, GDP will shrink by 1.5% this year, and business product by 2.5%. According to this forecast, the unemployment rate will climb above 8% by the end of the year, and private consumption will fall by 0.5%, or 2.5% per capita.
The second is that even if the government wants to help, its capacity to do so is limited, and the impact of a possible economic plan such as the one the central bank proposes will not be great. It can mitigate the effect of the great crisis, but it cannot solve it. If the bank's plan is implemented, GDP will fall by 1.1%, and unemployment will be around 8% at the end of the year.
On the face of it, the Bank of Israel called the press conference in order to present to the public the steps that need to be taken. It was stated openly that the object of the plan was to reduce the damage and not to prevent it altogether, something that cannot be done in today's conditions. The bank's message is a double one. To the Ministry of Finance it proposes more stimulus and implementation of measures now, in particular in making things easier for the unemployed: extending the period of entitlement to unemployment benefit and amending unemployment insurance legislation to allow a period of training. The bank also suggests that the Ministry of Finance should accelerate implementation of multi-year infrastructure plans and expand budgets that will lead directly to greater economic activity.
The second message at the press conference was a covert one to the politicians conducting the coalition negotiations. Fischer said that it was important that the bank should present its plan before a new government was formed. It is important, even very important, for the bank to tell the politicians that the capacity of the Israeli economy for greater government expenditure is fairly limited. The money available must be used to ease conditions in the labor market, expand infrastructure projects, and support Israel's export industries. All this translates to additional spending of some NIS 4.4 billion. In that case, there is no room for raising child allowances, as the Shas party demands, or for tax cuts not already planned, which prime minister designate Netanyahu has talked about.
In effect, the bank is saying that if it turns out that the recession is worse than expected, or if other government expenditure items are allowed to grow, it will be necessary to cancel planned tax cuts, and to cancel some of the measures it proposes to the government, to avoid a fiscal deficit greater than the economy can bear. Even then, in the best case, the deficit will grow to 5.8% of GDP, which means more debt and a larger debt to DGP ratio. The Bank of Israel believes that the Israeli economy can bear a limited spending increase, especially if it is a matter of temporary measures, but is very doubtful about the possibility of using expansionist fiscal policy to reduce the damage to activity and employment further.
It should be noted therefore that some of the main items currently being discussed in the coalition negotiations do not appear at all in the Bank of Israel's plan. Something else worth mentioning is that this will probably not be the last press conference that the governor will call on measures he recommends for dealing with the crisis. The Bank of Israel said that, as far as financial measures were concerned, particularly in connection with the credit market, it intended to examine new tools together with the Ministry of Finance and the Securities Authority. This means that the three will soon announce a new package of measures in this area. This is if it becomes clear that the credit market is not managing to emerge from its comatose state despite the planned formation of leverage funds and the granting of guarantees to banks so that they can raise capital.
Published by Globes [online], Israel business news - www.globes.co.il - on March 10, 2009
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