Speaking at a Calcalist conference, Governor of the Bank of Israel said today, "Exceeding the 3% fiscal deficit target will expose the Israeli economy to significant risk and will be liable to harm us citizens. We must show responsibility and take into account the consequences of our decisions over time. Israel's structural deficit, the deficit not subject to one-time shocks, is already one of the highest in the western world."
Flug added, "After the breach of the deficit framework in 2012, the government committed itself to a deficit of 2.5% of GDP in 2015. There are those who argue that the needs of the hour justify a rise in the deficit. A certain rise in the deficit can be justified because of the expenditure on Operation Protective Edge and the emerging decline in growth, but a deviation beyond 3% of GDP will represent a clear signal of retreat from the commitment to preservation of fiscal discipline.
"Such a deficit will raise the ratio of debt to GDP, and lead in the future to a substantial rise in the economy's interest payments, which reached NIS 38 billion last year."
Flug warned that raising the deficit target today would mean reduced social spending budgets tomorrow and would cause a sharp tax hike in the future.
Flug admitted that the interest rate cut that the Bank of Israel recently decided on would further push up housing prices, but argued that "the fundamental solution to the housing problem has to come from the supply side, and, in that respect, the fall in building starts that we have seen in the past few months is very worrying indeed."
"I should very much like to say that it is possible to ease poverty now, to provide budgets for every need in defense, education, health, and research, and more than anything I should like to tell you that all these additions can be made in the budget without anyone paying for it. But it is clear to you that to think that it is possible to do everything here and now is an illusion.
"My duty is to propose to the government a responsible and considered fiscal policy that points to a horizon of economic growth. The decisions awaiting the government are difficult, and the challenge facing the prime minister and the minister of finance is not simple. The government must provide a solution to very low public spending by allocating resources to supporting growth that will reach all sections of the population.
"What is required is a carefully considered expansion of the deficit, and to examine which tax exemptions should be abolished and which taxes can be raised. Civilian expenditure and low taxes have many supporters, but the result of these desires is a high deficit. As Governor of the Bank of Israel I am obliged to warn against the development of excessive deficits that are liable to endanger our economic strength," Flug said.
Published by Globes [online], Israel business news - www.globes-online.com - on September 2, 2014
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