Avi Simhon, chairperson of Israel’s National Economic Council, is not known for reticence. It’s hard to forget his vociferous appearances during the Covid pandemic, when he was in charge of the government’s compensation plan. Since October 7, however, Simhon, who is one of the people closest to Prime Minister Benjamin Netanyahu, and who sits in the Prime Minister’s Office, has not spoken publicly. The National Economic Council has not made its presence felt in the situation in which Israel finds itself.
Where did you disappear to?
""I heard that people were asking ‘Why isn’t Simhon, who was so dominant during the pandemic, getting involved?’ In the pandemic, the Budgets Division in the Ministry of Finance didn’t want to give anything to anybody. I intervene only when I think there’s a need. In this event, the Ministry of Finance presented a good plan. If I had written it, I would have done some things differently in the margins. You haven’t heard me saying anything bad about the minister of finance or arguing with him."
The Budgets Division actually has criticized the minister of finance. He took them by surprise with several decisions.
"When we meet, the minister of finance sits with his people, and the prime minister sits opposite him with his people, and the astonishing thing is that the bad things about the minister of finance come from those sitting beside him and not from those sitting opposite him. That is not supposed to happen. I don’t want to get into these relationships, because this is not the time. But the Budgets Division tried to portray a situation in which we face grave fiscal danger. That Is not the case. We are all under the impression of the disaster that overtook us, and many of us have children, relations, and other people we know who are risking their lives at the front, but, all the same, it’s important to realize that we have built a strong economy here, and it will remain so after the war."
The Bank of Israel also joined in the criticism, certainly over fiscal conduct.
"The Bank of Israel always expresses itself cautiously. When was the last time that the Bank of Israel supported a reduction in taxes? Never. Looking back, we are very glad that we reduced taxes. To a large extent, the Bank of Israel’s role is to be conservative. One thing should be everyone’s guiding principle: to give a true picture of the situation.
"The blow we sustained is extremely painful, but on the economic plane the State of Israel is in a very good position, it can absorb it economically."
"In the end, the Bank of Israel does exactly what the Fed does"
Right at the start of the interview, Simhon presented us with a test. He laid before us a sheet of paper with a pair of graphs on it, but no legend, and asked us to guess what the graphs represented. It was obvious that there was a correlation between the two curves, that they rose and fell in synch. When we failed to identify the source, Simhon confided, "The governor of the Bank of Israel didn’t manage to guess either."
The graphs indicated the link between the shekel-dollar exchange rate and yields on ten-year US Treasury bills. "The correlation is simply amazing," Simhon says. "Look at 2022. The shekel lost much more of its value against the dollar during that year than in 2023, with the judicial overhaul, the revolution - call it what you will - and with the war. The problem with people, even economists, is that they try to explain what happens on the markets by what they read in the newspaper. So they think that it’s because of the overhaul, because of Nasrallah, but it isn’t. The yield on US Treasury bills has nothing to do with the overhaul, right?"
How did the governor react to this clear correlation?
"The truth is that he was surprised. It’s not that I invented anything; any textbook will tell you the same. The governor teaches finance, that’s his field, and for that reason I recommended him at the time for the post. So I was taken aback when he started to say that the weakness of the shekel had to do with other things. What are you talking about? The governor became so immersed in the local discourse that for a moment he forgot what he himself teaches. But even after what has happened now, people ask, ‘Why has the shekel strengthened? Is it because someone thinks that Lapid did this, and then Netanyahu will do that?’"
You’re saying that, basically, the state has no influence over the shekel exchange rate?
"We have very little influence. If, when the Federal Reserve in the US raised its interest rate, the Bank of Israel didn’t raise its rate, you would see things happen. But in the end, the Bank of Israel does exactly what the Fed does. The Bank of Israel has no independent monetary policy, out of choice. I’m not criticizing it. If I were governor of the Bank of Israel, I would probably do the same thing. But it’s clear that there’s no great mystery here."
Perhaps there’s another conclusion to be drawn, that it’s not all that critical who sits at the Bank of Israel?
"Investor confidence doesn’t depend on this or that person, but on the economy. The Bank of Israel is actually important in the context of the banking system - whether or not it sees to it that the system is efficient and competitive." Incidentally, Simhon refuses to award a grade to the central bank on the question of the banking system, but he does reveal that he himself switched to the new digital bank One Zero "in order to encourage competition."
"To get to the point," Simhon stresses, "we have seen that the exchange rate is primarily affected by yields in the US. All the stories about the other things are truly just details. Now, the Budgets Division has tried to tell the government, ‘Be careful, it’s very dangerous, the deficit must not be breached or expanded.’ That’s fine, I understand it. My problem is with the claim that the State of Israel is somehow on the brink of a possible economic crisis. That’s the nub of my dispute with Yogev Gardos, head of the Budgets Division.
"Before decisions are made, whether to expand or contract the budget, we have to understand where we are. And the Budgets Division has a constant tendency, before the budget, with or without a war, to present the risks and put the emphasis on them. Why do I think that that’s a problem? If you put on a belt and braces and also hold up your trousers with your hands, then your trousers will indeed not fall down, but it’s impossible to run like that. Both the Bank of Israel and the Budgets Division are exactly the types who put on a belt and braces and hold their trousers up with their hands. Over-conservatism has a price.
"The Budgets Division told me that Israel’s risk indicator, the CDS, reflected high risk. That the State of Israel was in terrible danger. I said, ‘Baloney.’ In the end, what is the most important figure when you ask yourself, what is the State of Israel’s financial situation? To know what investors are thinking, there’s no need to look at the latest report from Moody’s. It’s enough to look at the interest rate that the State of Israel pays when it takes loans.
"If that interest rate is high, it means that investors are scared. If interest rates all over the world have risen, the question is whether our interest rate has risen by more than in the rest of the world. The graphs show that, most of the time, the interest rate that the State of Israel pays on ten-year bonds is slightly lower than the interest rate that the US pays on ten-year loans, calculating the rate for each country in terms of its local currency. There was a period in which Israel paid a little more, but now we have fallen slightly below the US. The gaps are very small."
Perhaps that’s thanks to the Budgets Division and its conservatism?
"In the 1980s, the State of Israel came to the conclusion that it was irresponsible, and the government handed over the keys to the Budgets Division. That really was a period in which the State of Israel was in difficulties and in economic trouble. Netanyahu too, to a large extent, very much strengthened the Budgets Division, both as prime minister and as minister of finance twenty years ago. But the Budgets Division are not the people who bear the responsibility, and nor do they have the authority. The people of Israel did not elect the Budgets Division. It elected those who are derisively called ‘politicians’, and those who can be called policymakers.
"For those people, it was convenient in the past to hand over the keys to the Budgets Division. As long as the State of Israel went from one crisis to another, it was the right thing to do. But, in the past twenty years, the high-tech miracle has happened to us. The world underwent a change to which we were very well adapted. And from the other side, we built here, and I think everyone has to give the credit to Netanyahu, an excellent apparatus for high tech. This combination brought it about that we went from being a country with a current account deficit every year to one with a surplus, from 2002 until today, continuously."
Although Netanyahu of 2023 is not the Netanyahu of 2003.
"Excellent, because the State of Israel of 2023 is not the same country as in 2003. If you do in 2023 what you did in 2003, you’re irresponsible. This is what the Budgets Division hasn’t understood. Because their DNA has been preserved since 1985. Today, that harms economic development; they put the brakes on everywhere."
"Worst case, we’ll reach a debt:GDP ratio of 70%"
Let’s go back to the cost of the war. There are estimates that speak of NIS 200 billion. Are you still optimistic with numbers like these?
"We don’t know how long the war will last, but I accept the assessment that if negative but possible scenarios materialize, the campaign will cost NIS 200 billion. I hope that that won’t materialize, but it’s not unrealistic. NIS 200 billion is 10.5% of GDP. So let’s say that, in the worst case, we reach a debt to GDP ratio of 70%. First of all, in the Covid pandemic it was more. Besides that, the US, France, and Britain have passed 100% debt to GDP. Germany is at over 65%. The Israeli economy is very robust; we won’t go back to the economic crises of thirty and forty years ago."
Expenditure like that will push up interest rates and could bring our credit rating down.
"It won’t push up interest rates, as long as the Israeli economy works as well as it does. Clearly, the economy has been hit. People are on reserve duty, and I too am not going to restaurants or on shopping sprees now. It could therefore be that the rating will fall. A country at war is riskier. But I know that the rating agencies know that the economy is very strong. I talk to them regularly.
"Clearly, the lower the expenditure the better, but the question is what price you pay to lower the debt to GDP ratio. There’s no magic number, and if I have to pay a price of suffering for our citizens for the sake of bringing it down from 70% to 65%, it’s not worth it."
If we grant that the economy is as good as you say, where do you nevertheless see risks?
"If we learned something on October 7, it’s that bad things can happen that we didn’t foresee, both militarily and economically. We have to be prepared. The dispute is over how much of a calculated risk to take."
Meanwhile, it looks as though this dispute is paralyzing the government. There are too many people around the table - from here it looks as though everyone is trampling on everyone else.
"That’s how countries are run. I’m not an onlooker, I’m in the midst, and I see, and I say, that it’s not true. Can it be said that everyone likes the way everyone else is behaving? Certainly not. But there’s an array of forces here that works pretty well."
Still, there are sectors trying to pull the blanket too much over to their side.
"I think that within the terrible disaster that befell us there were some rays of light. One of them is the desire of so many haredim to enlist, and the haredi parties also understand the need. There is going to be a very significant cut to the budget allocations to the coalition parties, in both 2023 and 2024. From what is left, most of the coalition budget is being cut by agreement with the haredi parties."
You’re talking about NIS 1.6 billion out of NIS 2.5 billion now available in the 2023 budget. That’s still almost NIS 1 billion that hasn’t been cut. We still haven’t touched the money for 2024.
"There is no demand for social-economic spending as a result of the war that hasn’t been satisfied. The Revival Administration hasn’t heard the word ‘no’ since the day it was formed."
It doesn’t bother you that politicians are taking money for sectoral purposes at a time of national emergency?
"In the end, in order for the system to move, you have to keep everyone together. You can say, ‘I know what’s good, I’m driving ahead,’ and in the end you find yourself alone. There are ministers who think that what they are doing is the most important thing in the world. For that. there’s a prime minister and there’s a government.
"The dispute is over very small amounts. The prime minister didn’t say abolish the cut, let’s go wild. For example, NIS 8 million were cut from geriatric institutions. The dispute is in the margins. Had the public wanted an accountant to run its affairs, it would have elected an accountant.
"A budget reflects a social outlook, and so Yogev Gardos is not more or less professional when it comes to discussing this or that matter. There are politicians whose values don’t match mine, there are those whose values do. I advise, that’s my job, and I do it well. It’s a fact that during my time we haven’t had any economic pitfalls. Do you remember what the head of the Budgets Division (Shaul Meridor) said to me during the pandemic? That I was turning Israel into Venezuela? He went, my policy was implemented, and, curiously, we haven’t become Venezuela."
Published by Globes, Israel business news - en.globes.co.il - on November 20, 2023.
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