Fischer: Bigger deficit means interest rate hikes

The Governor of the Bank of Israel's remarks are a rebuke to Prime Minister Benjamin Netanyahu, who proposes expanding the fiscal deficit.

28 June 12 14:47, Adrian Filut

"We're in good, but not great, shape. Why? Our fiscal situation will deteriorate," said Governor of the Bank of Israel Prof. Stanley Fischer at the Caesarea Forum today, in what amounted to a rebuke to Prime Minister Benjamin Netanyahu and his proposal that the fiscal deficit should be expanded. "This is not only related to the fact that revenues have fallen due to the slowdown, but because of underestimates about all kinds of commitments made by the government and agreements that the government has signed over the past two years. It can be said that the Ministry of Finance should make sharp spending cuts, but there's another of describing this: reduce the rate of spending growth ."

Fischer continued, "The Ministry of Finance should take bold action to stay within the budget framework. At the Bank of Israel, we're saying - although I hear other voices outside - that we must meet the spending limits that have been set. We assume that they will meet them, and there is need for hard work. The deficit will reach 3.5-4% of GDP in 2012. We have a structural deficit, and we must deal with it now. There are cynics who say that it's impossible to deal with this now because elections are coming. We don’t accept that, and neither do economists. The markets don’t accept it."

Fischer went on to warn that if the government did not restrain the fiscal side, the Bank of Israel would not be able maintain monetary restraint for long. "It is possible to use monetary policy and interest rate cuts. But monetary policy cannot set a low interest rate when fiscal policy is too expansionist, especially in the long term. If you try to do that, you'll cause inflation and economic instability. The Monetary Council cannot keep a low interest rate if fiscal policy does not have sustainable equilibrium."

Fischer also warned about a breakup of the eurozone, and implied that such scenario could not be ruled out. Therefore, he said, Israel should not raise the deficit target for 2013, in his first public response to Tuesday's decision by Prime Minister Benjamin Netanyahu to double the 2013 deficit target to 3% of GDP.

"There is a serious slowdown in the US. There is also a slowdown in China, and growth in India is slowing. The eurozone countries that have undertaken structural reforms, especially in labor, and which have kept fiscal discipline, are in relatively better shape. I know well that this is the case with us," said Fischer.

"The worst thing that could happen in Europe is the breakup of the bloc, a financial crisis, and deep and long recession. I estimate this probability at less than 50%.

Published by Globes [online], Israel business news - www.globes-online.com - on June 28, 2012

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