Governor of the Bank of Israel Stanley Fischer was a guest today at the "Globes" Israel Business Conference, talking "one on one" with Richard Quest of CNN.
Quest began the discussion with a question on the Israeli economy and the current slowdown, and asked Fischer whether he was optimistic. Fischer replied, "The economy is successful in most senses, and we forecast 3% growth next year. Before the European economy started to sink, I was sure that it would be better. Inflation is in the middle of the target range, debt is in good shape, as is the deficit."
What isn't doing well?
"The next government will have a big budget problem. The Ministry of Finance has declared that the deficit will be 4.2%. We know that they will have to cut NIS 15 billion from spending, and they may have to raise taxes. That's a huge budgetary problem, and one of the reasons that the prime minister decided to go for elections is that he thought that he would not succeed in passing the budget."
Are you happy with this rate of growth, considering that it's non-inflationary growth, giving you room for further monetary action?
"The markets think that the interest rate will fall, with a 50% chance that it will fall. Are they right? They're 50% right. Let's leave that to one side. Clearly there's room for interest rate cuts if the need arises, but I hope that we won't have to do that. We are monitoring home prices closely; if there are signs that prices are rising, we will need to examine what interest rate cuts might do. There are other tools."
Do the weaknesses in the Israeli economy mainly stem from external problems, or are they because of something happening in Israel?
"A large part of the weakness certainly stems from the global economy, and exports are not growing the way they have grown in the past few years. Investment demand grew very rapidly in 2011 and in part of 2012, and there's a significant slowdown. This means that people are less impressed with growth of 3%. That's a potential source of difficulty, and there's a degree of uncertainty in the geopolitical arena."
What worries you more than anything about what the next government will or won't do?
"That is the main concern: it will not be easy to deal with the budget problem. It's a fact that they did not manage to pass a budget a few months ago. The question is whether the government will succeed in getting the economy onto a successful growth track. The fear is that, because of the political situation, there will be a budget that barely meets the criteria."
Concern over the business climate
What budget deficit would you like to see?
"I'll leave that to the next government, but the deficit is now more than double the target. I'm also concerned about the question of the business climate, as seen from within and from the outside. The World Bank does a report on doing business in 85 countries. In the past two years, we have fallen from 32nd in the list to 38th, which is not good. It reflects the general feeling of businesses, it's connected to bureaucracy, to the process of building and registering assets, and so on. We are not succeeding in this area, and we must deal with it if we want the economy to grow again."
The budget is not in a good situation, the economic situation is slowing down, and the business climate is liable to get worse. Have I understood aright?
"It's always good to have someone who'll translate for me, but I can say that we are growing at 3% and we have no balance of payments problem. We are growing better than any other Western economy, so we aren't getting along badly."
If the next government doesn't hit the deficit target, will you take steps?
"That depends on the reasons. If it's because of tax collection or the economic situation, then it's not certain that the deficit should be reduced. We have to wait and see. One of the things that Israeli governments have bought in the past 6-7 years is that they moved from a debt-GDP ratio among the highest in the world to one among the lowest in the world. Now we look good, and we have more room to conduct an expansionary fiscal policy if necessary."
Where do you stand on the argument between raising taxes and cutting expenditure in order to balance the budget?
"The question is what you can do. Most of the research shows that changes in spending are more effective than raising taxes. We cut taxes a lot in recent years, and the Bank of Israel argued, rightly, that the cuts came too fast, and were actually a step backwards."
Do you believe that social spending should rise?
"It's very helpful to boost the efficiency of social spending, and we have a problem with education."
The fiscal cliff: "I'm less optimistic"
Between hammer and anvil, which is more severe, the euro crisis, or the fiscal cliff?
"Both situations are dangerous and serious."
Clearly they can deal with the fiscal cliff.
"I'm less optimistic."
Perhaps it's worth falling off the cliff in order to change the structure in the long term?
"There is a short-term argument that all the tax reductions will expire on December 31 this year, and then tax rates will rise, and Obama will be in a position where if he wants to make cuts, he will be in a good situation. I don't know, and I don't believe, that that will cause the politicians enough pain to make them do the right thing. I hope that they'll do the right thing."
"Influencing demand doesn't build housing"
Let's talk about housing. You intervene as necessary. What do you see as your responsibility when housing prices get out of control?
"We have to do what we can to prevent that. The main problem of central banks is that they deal with finance on the demand side. We can impose regulation on the banks and raise interest rates, but that doesn't bring down the cost of housing or assist in constructing more apartments. The problem has to be solved on the supply side. If the supply of land is raised, it will be possible to bring housing prices down. If the building permit processes and the bureaucracy in the housing market can be speeded up, supply will rise, and that will bring down prices. We have no control over supply."
Of course that will represent an economic engine…
"Certainly, it's a source of growth."
"I'd very much like to stay"
Your term of office ends in 2015. Would you continue for a third term if it were legally possible?
"You have caught me between principles and feelings. I believe in a limit of ten years in office for governors of central banks. It's a very challenging job, and it's a very great privilege to be in the post of governor of the central bank of Israel. I stopped teaching when I lost the fear and that sensation in the stomach before I went in to lecture in front of students. I don't want to lose that sensation in the stomach when I stand in front of the people I work with and in front of journalists, before I decide to leave."
Will you stay in Israel after your term ends?
"I very much want to stay, I feel connected to Israel, but I have family in the US, and we will have to decide. I don't intend to disappear."
Do you aspire to fill a public role after you finish?
"There are very few roles that I would prefer instead of my job, and I don't think that they are vacant."
Published by Globes [online], Israel business news - www.globes-online.com - on December 10, 2012
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