The Bottom Line / The Keynesians will have to wait
Despite headlines of astonishment, the truth is that November's negative consumer price index was, in fact, no surprise at all. The real surprise was that in an economy in recession the September and October CPIs went up in total by 1.4 percent.
Despite headlines of astonishment, the truth is that November's negative consumer price index was, in fact, no surprise at all. The real surprise was that in an economy in recession with thousands of businesses folding, an economy suffering from high unemployment, an erosion in wages, declining investment and dismal forecasts, the September and October CPIs went up in total by 1.4 percent. In the economy's situation, prices should be going down or at least remaining stable, so the November index was definitely the more plausible scenario in current circumstances.
The negative CPI will influence David Klein's interest decision next Monday. The monetary indications point to a rate cut. Inflationary expectations for next year have dropped to 3 percent, the amount of money in the economy went down in November and both the chairman of the U.S. Federal Reserve Board and his European counterpart have recently cut their interest rates, pushing up the interest rate gap between the shekel and overseas currencies.
But these indications are countered by the issue of the budget. Even if the budget is passed this week, the governor won't be able to make a significant rate cut. First of all, it isn't yet clear whether the cut in the defense budget is real. The Defense Ministry is still waiting for the special grant from the United States. Furthermore, the cuts in the supplementary income clauses won't be fully executed, vocational training centers won't be axed and cuts in Shas' ministries still have to go to a "panel."
But the big problem is revenues. The revenue forecast for the budget isn't realistic. Revenues from taxation will be some NIS 6 billion less than registered in the budget books, making it quite clear that immediately after the elections the new government will have to declare more budget cuts and only then will the governor be able make significant rate cuts.
In any event, after last June's financial crisis, it should be clear to everyone that it is not conceivable under any circumstances to exceed a budget deficit of 3 percent in 2003. The proponents of the Keynesian model, who believe that in an open market it is possible to increase the deficit and thus extract the economy from recession, must understand that the government does not presently have the freedom to decide to increase the budget deficit. Because the moment it dares to exceed the 3 percent deficit, the public will lose its remaining confidence and rush out to sell its bonds and buy dollars, leading long-term and then short-term interest rates up. The devaluation will to an inflationary outbreak, which this time will be compounded by a cut in Israel's sovereign credit rating.
In other words, the financial crisis of June 2002 put us in a double bind: the loss of both monetary and fiscal flexibility. Therefore Silvan Shalom won't dare to increase the deficit and the governor won't dare to sign another package deal after the failure of the first. They have both learned an expensive lesson, and the Keynesians will have to wait.