After a long silence, Governor of the Bank of Israel Stanley Fischer has officially revealed his stance on the main elements of Prime Minister Benjamin Netanyahu's economic plan. A comprehensive study by the bank's Research Department, considered the strongest research body in the Israeli economy, states, "The many one-time measures in the 2009 and 2010 budgets, chiefly in the area of taxation, cumulative government commitments to extensive spending after 2010 under multi-year agreements and plans, and the decision to cut tax rates substantially in the period 2011 to 2016, give rise to doubt about the government's ability to return to a reducing debt:GDP ratio after 2010."
The Bank of Israel explains that Netanyahu's economic proposal contains a double problem. The first problem is the plan to reduce income tax by 2016 to 18% on companies and 39% on individuals. The Bank of Israel again expresses firm opposition to the idea.
The bank has even calculated the damage that will be caused by falling tax rates, and says that full implementation of the plan will mean a rise of about 1% annually in the debt:GDP ratio, bringing it to 87% in 2016, versus 78% today. The debt:GDP ratio is considered by the Bank of Israel, the Ministry of Finance, and the rating agencies, to be a main criterion of economic strength. "Further tax cuts are impossible," a senior Bank of Israel official said.
The second problem with Netanyahu's plan is that the size of the multi-year commitments makes it impossible to determine that the rate of growth in the budget will return to 1.7% after 2010 (in 2009 and 2010, the growth rate is over 3%). "It simply won't happen. Even if the government decides to carry out half the reforms that it plans, budget growth after 2010 will not be 1.7%," the study says.
Published by Globes [online], Israel business news - www.globes.co.il - on June 17, 2009
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