Wednesday, January 25, 2006

Globes: Fischer: Use good years to cut government debt

What a concept for Israelis? You mean we should think long term?



This is a very bitter pill for most Israelis, known for not having an ouce of "Savlanut" to swallow. But how could lowering taxes end a recession? But we need more money now not later! Why worry about tomorrow.

Stanley Fischer is the best thing to happen to Israel as he tries to break the country out of the Socialistic mold that has plagued this country for years.

Israel - the time has come to embrace capitalism.

Globes' Zeev Klein reports [bold mine]:
Fischer: Use good years to cut government debt

The governor of the Bank of Israel gave an optimistic survey of Israel's economy at the Herzliya Conference.

In his speech at the Sixth Herzliya Conference on the Balance of Israel's National Security today, Governor of the Bank of Israel Stanley Fischer raised his GDP growth forecast for the Israeli economy in 2006 to 4.3%. Fischer estimates that business product will grow by 5.4% this year.

In December, Fischer estimated that the economy would grow by more than 4%, and that business product would grow by more than 5%. According to the Ministry of Finance's official forecast, the economy is expected to grow by 3.9% this year.

"The picture that emerges from the initial estimates of the National Accounts published by the Central Bureau of Statistics is one of an economy growing nicely, with GDP increasing by 5.2%, with business-sector product leading the way with a fine 6.6% rise…

"Against this background, and assuming that the next government will follow the same macro-economic policy, an assumption which appears eminently reasonable, the Bank of Israel's forecasts for 2006 are of a 4.3% increase in GDP, and 5.4% increase in business-sector product."

Fischer referred indirectly to yesterday's 0.25% interest rate hike by the Bank of Israel, saying "The Bank of Israel is making its contribution mainly by following a monetary policy, i.e., an interest-rate policy, that acts to strengthen price stability, in line with the government's target, to help economic growth and employment in the long run, and to bolster the stability of the financial system."

Fischer said the world economy had greatly helped economic recovery in Israel and the country's growth momentum. "It is therefore important to bear in mind that Israel's future growth will be affected also by future global growth. The latter is expected to be about 4% in 2006."

The central bank governor warned however that "we must be alert to the risks to global growth and see whether they will really affect it. I mean the possibility that energy prices, particularly oil prices, will continue to rise, the effects of the rise in interest rates world wide, and the possibility that the US economy will grow more slowly than originally estimated."

On the security situation, Fischer said it would have an important impact on economic growth. "It is clear that a state of calm, and specifically expectations of a peace process, have a positive influence on Israel's economy and thus constitute a very important factor. This is expressed in particular via tourism and domestic and foreign investors' willingness to invest in Israel," he said.

Fischer added that we were currently experiencing some of the best years the Israeli economy had known, and that this should be exploited to reduce the debt burden as a proportion of GDP. "In 2003 we reached a ratio of 104%, and it seems that for 2005 the ratio will be slightly below 100%. This reduction is due to the low deficit, the rapid growth rate, and the proceeds of privatization. The burden of servicing the government debt is about 6% of GDP and amounts to a huge NIS 33 billion a year," he pointed out.

"To put this in perspective," Fischer continued, "let me say that if the debt/GDP ratio were to fall to about 50%, a reasonable ratio by international standards, interest payments would fall to less than 3% of GDP and less than 8% of the budget, because the interest rates would fall, and about NIS 17 billion a year would be available for other economic uses."

Fischer gave two further reasons for placing emphasis on reducing the debt to GDP ratio: the sensitivity of the economy to changes in global interest rates, and the restriction on the government's freedom of maneuver during periods of recession, that high government debt causes.

"Reducing the debt/GDP ratio would enable the government to implement a counter-cyclical budget policy. In other words, at times of recession in economic activity, the government could adopt a policy of tax cuts and perhaps increase its expenditure to encourage a rise in demand and thereby contribute to quicker recovery. That is what the US did in 2002 when the recession started there. And that is what Israel, Germany and France were unable to do at that time. Why not? Because a counter-cyclical policy in a recession increases the budget deficit, and hence the debt, too quickly. And if the debt/GDP ratio is already too high, as in our case, a counter-cyclical policy is dangerous as it is likely to cause a financial crisis, and that just in the midst of a recession."

On social policy, Fischer stressed two points. "First, it is important to continue focusing on a policy that serves to create sustained growth, which is vital for the enhancement of the economy's ability to cope with the social problems especially the reduction of poverty.

"Second, it is important to focus on education and health for the entire population, including its weak groups. The accessibility of better education and health to the weaker groups is very important, to provide them with equal opportunities to realize their potential and to progress in the labor market."

Published by Globes [online], Israel business news - www.globes.co.il - on January 24, 2006

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