Governor of the Bank of Israel Prof. Amir Yaron told the cabinet today that there should be no tax hikes in the 2021 budget and any discussion of such measures should be postponed until the 2022 budget. He said, "We must avoid using contractionary fiscal tools that may have a negative impact on the recovery of the economy," adding, "The timing of the change in policy direction depends on developments in the coming months, and the process of updating the 2021 budget at the time of approving the 2022 budget, which is planned for the beginning of 2021, may be an appropriate point to start such a process." The process he refers to is narrowing the budget deficit.
The cabinet today approved the Ministry of Finance's proposal for an additional emergency budget of NIS 14 billion to be added to the NIS 50 billion in expenditure already approved as part of the government's NIS 80 billion economic rescue plan.
The additional budget is to finance NIS 6 billion in grants to encourage companies to bring back employees who have been furloughed or fired during the crisis and to set up a NIS 4 billion fund to provide major credit guarantees to sectors hit hardest by the crisis as well as to expand other credit guarantee funds. Yaron told the cabinet, "Opening businesses and accelerating processes to reduce unemployment are an important part of the exit strategy from the crisis, and the more rapidly employees return to work, the more the risk of a continued impact on the economy will decline."
With more than a hint of criticism of Ministry of Finance reluctance to implement aspects of the plan, Yaron added, "If there are reservations regarding details of any model, the most important thing at the current time is speed of performance and reduction of uncertainty. The details of the plan must be announced immediately, and it must be activated quickly even if its arrangements are not perfect. The chances that the model that is implemented will succeed in contributing to employment will be greater the faster it is announced and implemented."
Speaking about the deficit itself, he said, "The cost of these plans, alongside the loss of tax revenue due to the impact on economic activity, are expected to increase the deficit to levels we have not seen for many years, and to markedly increase the debt to GDP ratio. In recent years, the Bank of Israel has called for strict adherence to a low deficit level that would enable continued stabilization and reduction of the debt to GDP ratio, but the crisis created a new reality in which it is correct to temporarily increase the deficit and debt in order to prevent prolonged damage to the economy due to the negative impact on households and on businesses’ survival. Expanding budgetary expenditure at the current stage will help accelerate the exit from the crisis, and the Bank of Israel therefore supports its approval and implementation."
On a final cautionary note, Yaron said, "We believe that following approval of the program, it will be proper to act cautiously and to avoid additional budgetary expansion for some time, until the implementation of the measures that have already been approved is completed and the extent of their effect becomes clear."
Published by Globes, Israel business news - en.globes.co.il - on May 24, 2020
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