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The Bank of Israel waxed positive yesterday about the economy's prospects in 2010, despite being highly negative about its situation this year.

For this year the central bank is predicting negative growth of -1.5%. But the central bank brass is quite optimistic about the following few years.

Bank officials project that the Israeli economy will recover in 2010, growing at a clip of 2.3%. Moreover, they see growth accelerating to 4% in 2011, and to a brisk 5% in 2012.

The Bank of Israel's outlook was published this week by its research department, which is headed by Karnit Flug.

The department's report says that even if the government does manage to limit expenditure growth to 1.7% a year, as it's supposed to do under the law, then Israel's debt-to-GDP ratio (which haf fallen to 78.1% in 2008) will shoot up anew, to 85.7% this year, and rise again to 87% in 2010. After that, the ratio should decline, the department writes.

The central bank foresees a 5.2% budget deficit this year, dropping to 1.9% in 2012.

However, the Bank of Israel admits that recovery could tarry, with zero growth next year and 2.3% the following year.

Even this more pessimistic outlook projects a 5% upturn in 2012.

"Given the credibility that the government has established," the report says, "it woudl be better not to respond to increase in the deficit with fiscal cuts or higher taxes, which could exacerbate the recession," the report states. Instead the governmetn could amend the law, to give it more freedom to increase the deficit.

The bank also called on the government to present a comprehensive plan based on multi-year fiscal targets and benchmarks.

The bank foresees the need on the government's part to slash its spending in 2010, but presented details for extending the period of entitlement for jobless benefits.

The Bank of Israel proposal, based on the present unemployment rate of 6.3%, would cost the state an extra NIS 325 million.

At an average 7.8% unemployment rate which the bank projects for this year, the additional cost would be NIS 445 million.