At the ceremony marking her induction as Governor of the Bank of Israel today, Dr. Karnit Flug surveyed the state of the Israeli economy and the Bank of Israel's role, and set out an economic agenda for the coming years. After thanking the prime minister, the finance minister and the president for placing their confidence in her, and paying tribute to her predecessor Stanley Fischer, Flug spoke of the example of her parents, both Holocaust survivors. She then went on to speak in her role as economic advisor to the government, identifying the issues that the government needs to tackle, placing the emphasis on productivity.
"First and foremost, we must find the ways to increase the growth rate of productivity in the Israeli economy," she said. "There is tremendous potential lying within the Israeli worker, but GDP per employee does not match that of the most advanced economies, and as a result, the economy does not succeed in allowing citizens a standard of living in line with that of the most developed economies. We must find the way to increase the attractiveness of investment in the economy and to increase capital stock, to improve the competitive environment in which the business sector operates, and to reduce the bureaucratic burden. We must continue our efforts to increase the participation in employment of those population sectors which are still characterized by low employment. The expected demographic trends do not support a high rate of growth in the coming years, and we will need to act to offset the effects on growth of those trends in order to continue to grow at a satisfactory rate.
"High growth rates are not enough; it is very important that the fruits of growth are divided more equally by all parts of the population, so that they will support the reduction of poverty and of inequality in income distribution. We want inclusive growth, which supports the cohesion between various population groups, and within the groups themselves. Social cohesion is a prerequisite for national strength, and for forming a society in which our children, as well, will want to live and raise their children. Increasing labor force participation has an important role in this regard as well."
On the question of the cost of living, which has been of central interest in the economic debate in recent years, Flug said, "Improvements in productivity and the rate of growth will necessarily bring with them an improvement in the purchasing power of the Israeli worker, in particular if the growth will be distributed more equally. But the cost of living is also partly related to the structure of the economy, to the level of competitiveness and the level of concentration of the economy. We must continue to strive toward an economy with a competitive environment, in which every producer can rely on its relative advantages and offer the best products and services, and in which every consumer has the access and ability to choose the cheapest and most appropriate goods and services. In recent years, we have seen important reforms in this area, and we must continue to carry out reforms which will reduce the concentration and increase competition. In the banking industry, as well, changes are occurring which increase competitiveness and the consumer’s ability to compare and choose the best and cheapest service. Alongside these changes, it is important to continue the efficiency measures in the banking system, so that competitiveness will increase while maintaining the stability of the systemstability which is a necessary condition for a growing and thriving economy."
On housing prices, perhaps the most difficult problem facing young families, Flug continued the line of her predecessor Stanley Fischer is saying that the problem lay on the supply side, which is the government's responsibility.
"Housing prices have increased in recent years at an accelerated pace, and have also been a significant component in the rise in the cost of living," she said, "Within the framework of setting monetary policy, and its responsibility for financial stability and banking system stability, the Bank of Israel deals with the consequences of a low interest rate environment, which is derived to a great extent from the monetary policy adopted in major economies worldwide. The regulatory steps taken by the Bank of Israel helped to reduce the risk to which both borrowers and the banking system are exposed. Ultimately, the solution will need to come from bringing the supply of homes in line with the basic demand for housing services, and we must hope that the steps being taken by the government in this area will bear fruit."
Commenting on the tax burden and the quality of public services, Flug said, "Israel’s agenda also includes the discussion about the size and the role of the public sector in the economy, and the structure of the tax system. After several years of reducing the share of government expenditure in GDP and reducing the tax burden, voices are heard calling for expanding the scope of services that the government provides for its citizens. The optimal size of the government cannot be calculated by one economic model or anotheran economy with a small government and low tax burden can grow and thrive, as can an economy in which there is a larger government and greater tax burden. The size of government expenditure, ultimately, is the result of society’s preferences. However, we must remember that the size of government and the tax burden go hand in hand. If we choose a large government which will provide public services with high quality and quantity, will invest in infrastructure, and will be actively involved in supporting engines of growth, we will have to bear a higher tax burden. It is not a simple choice, primarily because we will not be able to allow ourselves large deficits and a growing public debtthose will endanger the financial stability of the economy, and negatively impact growth and quality of life in the long term."
Published by Globes [online], Israel business news - www.globes-online.com - on November 13, 2013
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