"We see growth forecasts for the US of just 2%. Europe is in a recession, and there will be very weak recovery next year. Emerging markets are in slightly better shape. Global trade is growing, but slowly. Our exports will be weak next year, and for several years after that," Governor of the Bank of Israel Prof. Stanley Fischer told the Knesset Finance Committee today.
Fischer said that Israel currently pays 4% of GDP a year on interest for previously issued bonds, adding that reducing the deficit would lower this interest rate. "This amounts to about NIS 40 billion. With this money, we could do many things, which is why we must not let the interest rate rise," he said.
Fischer outlined two scenarios for the debt crisis in Europe. "Either Europe will deal with it, or it will collapse and countries will begin to quit. That could happen. We cannot know what will happen in the second case; it may be accompanied by a financial crisis. Some people are talking about Lehman Brothers II. I don’t know. The only thing I do know is that I don’t know. We must therefore prepare. The economy must be ready in advance, not afterwards. We must maintain financial stability, as well as fiscal stability and the budget."
Fischer criticized calls for increasing the deficit, saying, "Comrades, we've already raised the deficit. This increases the burden on the following generations. I thought that we should stop at 2.5%. It is essential that we meet the 3% target and do not begin to get lost. The 2013 deficit will reach 4.5% of GDP if we keep all the spending, but do not raise taxes. We'll have a deficit of 6.5% of GDP if we don’t raise taxes and we don’t deal with the spending side. A deficit of 6% of GDP with 3% growth is a situation of structural deficit.
"We must deal with this problem. How? There is an attitude of 'it will be all right'. If there is a crisis and we have to raise taxes - that will be bad. You do not raise taxes during a recession. The response must come now, when there is no recession here and there is growth. So 'it will be all right' is bad because it will not be all right.
"The second approach is to recognize the facts. The facts are that things do not look good. There is a not small probability of a severe recession in Europe, and if that happens, it will affect us."
Fischer called on the Finance Committee to pass the fiscal package, and to pay particular attention to the issues of trapped profits and stricter tax collection. He warned, "If the money does not come in, we'll have to take more measures. It's very easy to say, 'it will be all right', especially before elections, but it is very responsible to deal with the problem now, especially when we're talking about a structural problem like the deficit."
Published by Globes [online], Israel business news - www.globes-online.com - on August 1, 2012
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