Government cutbacks reduced debt and the budget deficit and helped the Israeli economy skirt the global crisis, but they also worsened social inequality, the Bank of Israel said in its 2011 report on Wednesday.

According to the bank, inequality widened due to "the reduction in National Insurance Institute allowances, slower growth in outlays for public services, and lower direct taxes, whose main beneficiaries were the top two deciles."

At a press conference, Bank of Israel Governor Stanley Fischer said the poverty rate had fallen moderately because unemployment was so low.

"In effect, everyone who wants to find work, finds it," he said, adding that the middle class' living standards had risen in recent years.

Regarding bank fees, a hot topic in recent years, Fischer said that over the past three and a half years, fees had dropped 17 percent. But the public can't expect bank fees to disappear, he added.

"We need profitable banks so that they continue to give credit," he said.

Fischer added that "if the government accedes to the demands of the defense establishment and enlarges the defense budget by billions of shekels, there will be no choice but to impose new taxes."

He rejected further across-the-board cuts or increases in the budget deficit to fund heightened defense spending.

"The economy is in good shape, but not great shape, because of the global economic slowdown," said Fischer. "Economic growth of around 3.1 percent according to the Bank of Israel's forecast, and 3.2 percent according to the treasury's forecast, is respectable, but not the growth rates of 2004 to 2008."

Fischer also criticized the negotiations between the Prime Minister's Office and the treasury over gasoline prices.

"They're always making small adjustments; on gasoline taxes, for example," he said. "This leads to too many games with the budget and doesn't lead anywhere positive."

Prime Minister Benjamin Netanyahu was pleased the central bank had recognized that "the Israeli government acted responsibly and remarkbly," he said. "We've developed our economy in a way that sets us apart from other countries. While they were collapsing, we were growing."