Bank of Israel Governor Stanley Fischer told a Knesset temporary Finance Committee session yesterday that the state could handle the collapse of a single local tycoon. But Israel would be in trouble if several of the country's richest businessmen went under, he said.
The meeting was dedicated to preparations by the state and Knesset for handling the economic recession and centered around Fischer's comments.
Responding to a query by MK Ofir Akunis (Likud) on the banks, Fischer said thatno banks are in danger of collapse and the public's deposits are safe. On the global situation, Fischer said that all developed countries are or will be involved in the economic crisis - a state unprecedented in recent decades. The last quarter of 2008, he said, was the worst experienced by the global economy since the end of World War II. In Israel, exports plunged by a sharp 40%, in annualized terms, while Japan and South Korea economies contracted by 16%.
Fischer added that the future of the global economy, and the Israeli economy within it, depend on the recovery of the United States economy. He said it was impossible to predict when the U.S. will rally from the recession.
Commenting on the budget deficit, Fischer said that Israel, in contrast to the U.S., can't handle an annual deficit of 12% ($1.8 trillion). The U.S., he said, is seeing positive signs, for instance, an increase in private consumption during the first months of 2009, but there is still a long way to go.
Bernanke foresees an end to the recession by the end of 2009 or in early 2010. But it is important to clarify, Fischer said, that an end to the recession means an end to the market's slide - meaning that the economy will have reached its lowest point, not that the public will start to recover yet.
The central bank governor said that while the budget should allow for increased spending Israel's hands are tied by a high debt to GDP ratio of 80%, and an enormous budget deficit of NIS 40 billion is expected this year.
On the treasury's long-term program to reduce taxes, the final milestone of which is scheduled for January 1, 2010, Fischer suggested waiting to see how the economy is faring before deciding whether to keep to the schedule.
During the Knesset debate that followed the meeting, former Finance Ministry director general Avi Ben Bassat said that the tax cuts planned for January 2010 should be delayed in light of the state's hefty budget deficit. He pointed out that at 37% of GDP Israel's tax burden is in line with developed states, and said it was more important to increase unemployment benefits than to cut taxes.
Ben Bassat called on the new government to decrease the defense budget and trim at least a quarter, or about NIS 10 billion, from tax exemptions, which will total NIS 39 billion in 2009.
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