In recent talks between Finance Minister Silvan Shalom and Bank of Israel Governor David Klein, disputes have arisen regarding the required budget cuts. Shalom believes that no more should be cut from the 2002 state budget and that just NIS 7 billion should be cut from the 2003 budget. The central bank governor wants to see NIS 10 billion chopped from the 2003 budget, in addition to a further cut in the 2002 budget.
Klein is demanding the cabinet make the budget cut this year in order to achieve a lower deficit than the official 3.9 percent target, which, he believes, will prevent the economy's return to growth in 2003. Klein also wants to see a 3 percent deficit in 2003.
The central bank governor believes the growth rate in 2003 will be in the 0-1 percent range and that the treasury must base its projections on these numbers. In addition, in order to meet the 3 percent deficit target, deep budget cuts must be made in his opinion. In the talks with Shalom, Klein has also demanded an increase to the physical infrastructure clauses in both this and next year's budgets.
At a conference yesterday in Tel Aviv, Klein reiterated his assumptions Shalom, on the other hand, opposes further cuts in the 2002 budget. He believes that many cuts have already been made and that the economy will meet the deficit target of 3.9 percent. Shalom also estimates that growth in 2003 will reach between 1-2 percent and, therefore, vehemently opposes the NIS 10 billion budget cut proposed by Klein.
Shalom has not yet named a figure he sees as necessary, but senior treasury officials said yesterday that a sum of NIS 7 billion had been discussed in internal talks.
The treasury believes economic recovery will begin in 2003, under the influence of a global recovery and an increase in exports due to the devalued shekel, as well as increased private consumption. The governor, on the other hand, does not foresee recovery in private consumption in 2003 due both to the security situation and the capital market retreat of the past few weeks that has led to significant household losses. The governor also believes it is too early to determine that a global economic recovery has begun.
The bank believes public confidence in the economic leadership will return if all these steps are implemented, enabling the bank to return to a price stability target, with annual inflation in the 1-3 percent range.
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