Bar-On: The Israeli Economy Will Withstand the World Economic Crisis

Bar-On named the three main policy goals of the treasury: Lowering the GDP-to-debt ratio, keeping within budgetary spending limits and lowering taxes.

"I believe in the strength of the Israeli economy and its ability to withstand the shocks of the world economy, as has been proved in previous cases," Finance Minister Roni Bar-On told the cabinet yesterday at its weekly meeting.

Prime Minister Ehud Olmert told the cabinet: "The Finance Ministry and finance minister are responsible for for formulating economic policy." Olmert was responding to recent reports that senior officials in the Prime Minister's Office were attempting to intervene in setting the state budget.

Part of yesterday's cabinet meeting was devoted to to a presentation on the state of the economy by Bar-On and senior treasury officials, along with the governor of the Bank of Israel, Stanley Fischer.

Bar-On emphasized: "Israel is part of the global economy and therefore it is impossible to prevent the leakage of negative influences from the developments in the world economy to the Israeli economy." According to Bar-On, the treasury is implementing a policy of "automatic stabilizers" for the economy, with keeping government spending from exceeding the budgetary framework as the policy's centerpiece, alongside lowering taxes. The automatic stabilization in this case refers to a situation in which lower than forecast tax revenues lead to automatic adjustment in ministry spending. At the same time, Bar-On said the treasury is working to remove barriers to various infrastructure projects to help stimulate the economy.

Bar-On named the three main policy goals of the treasury: Lowering the GDP-to-debt ratio, keeping within budgetary spending limits and lowering taxes. According to Bar-On: "The treasury will continue to maintain a responsible economic policy, which will require adjusting the levels of obligations we have taken on ourselves within the framework of the allocated spending in 2008 and 2009." It was necessary to refrain from making decisions that would require additional budgetary commitments, he said.

In light of the world economic crisis, Bar-On said Israel was at a better point than other economies after four years of growth of more than 5%. "The Israeli economy was exposed in a limited way to the subprime crisis and the liquidity crisis. Nevertheless, the crisis in Western capital markets and the changes in exchange rates are expected to influence the performance of the Israeli economy," Bar-On told the cabinet.

Treasury director general Yarom Ariav told the cabinet: "The [economic] indicators testify at this stage to continued economic growth, even though at a more moderate pace. Our situation is relatively good compared to the rest of the world, but it is important we act wisely to keep to a unified and responsible economic policy."

Stanley Fischer forecast that the shekel would continue to strengthen against the dollar in the medium- and long-term future. He said exporters would be wise to prepare for such an event. According to Fischer, Israel - as part of the global economy - may be hurt by the U.S. recession and the slowdown elsewhere. He said Israel is entering the world crisis in good shape.

Fischer feels the economy will grow in 2008 at a slower pace than in the previous four years. However, Israeli economic growth will be higher than in the U.S. and Western Europe; and similar to the average Israeli growth rates over the past 25 years. According to Fischer, the central bank's growth forecast for 2008 of 3.2% is not pessimistic, even if it is lower than growth in previous years.

The governor noted that the central bank's recent intervention in foreign exchange markets was done with the complete approval of the treasury. The central bank and the treasury agreed months ago on increasing the size of Israel's foreign currency reserves by $10 billion, and the bank waited until the time was appropriate. Fischer called on the cabinet to support Bar-On's policy to stay within the budget framework.