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Anyone who thinks that yesterday's meeting between the Governor of the Bank of Israel and the Finance Minister was "good," is making a mistake. That said, it was much better than their previous meeting, two weeks ago.

Once again, this time round, no agreement came out of the meeting - not on the structure of the budget, nor on the size of the deficit, nor on interest-rate policy. The differences of opinion remain intact and the only difference is that the finance minister and his director-general have declared a "cease-fire", that is, they will not voice opposition publicly to raising the interest rate.

What is interesting about this cease-fire is that it is one-sided. Silvan Shalom will not speak about the interest rate in public - but Governor David Klein did not "sign" an agreement not to make public remarks about the budget. On the contrary: He is planning to speak out sharply, and very soon, about the budget's management and the exorbitant deficit. He will speak this Thursday at an economic conference and also next Thursday at the Caesarea conference. Will Shalom be able to uphold his cease-fire?

In any case, Shalom did not declare the cease-fire out of a new love for Klein but rather because of his fear, and that of Prime MInister Ariel Sharon, for the economy's stability. They are afraid that the dollar will pass the NIS 5 mark and continue galloping upward; then inflation will soar and there will be such a financial mess that the economy will be mortally wounded and they will be ousted from power. In order to prevent this danger, they are prepared for the governor to continue raising the interest rate, and the sky is the limit. Yesterday the bonds market left the governor no choice but to make a substantial raise. But why 2 percent?

The governor felt that if he raised the interest rate by 1.5 percent, this would not indicate anything unusual, because it is not new. On the other hand, were he to have raised it by 2.5 percent, this would have been too strong a blow against the business sector and against households; the dollar would have dropped and the pressure to make the necessary cuts in the budget would have lessened - and this he wanted to avoid. So he chose the middle way of 2 percent.

At an internal discussion in the treasury last night on the questions of macro-economics and the 2003 budget, Shalom said his main aim now was to settle the markets. Therefore, following Klein's attack on the interest rate (4.5 percent in a month), it now remains for Shalom to do the main job: to change direction with regard to budgetary policy with the aim of reinstating trust in the economic leadership and thus to stabilize the financial markets.

The only way to gain trust is for Shalom to submit only one budget for the year 2003, without corrections and without changes - instead of the current zig-zag policy. To this end, he must present an extremely conservative budget from the income point of view, namely a most conservative estimate of next year's growth and the income from taxes, and a very deep cut into the budget - more than the NIS 5 billion that the treasury has been talking about.

Such a deep cut into the flesh requires a change of tone from the minister. He will have to make a speech of sweat and blood, to warn the public of the dangerous situation, to say that the war in the territories will not be over soon and that therefore the Negev Law and the Large Families Law have to be canceled, and that a special law must be promulgated immediately against private legislation, and that the proposed "Governors' Law" in its present form must be canceled.

This kind of policy will stop the galloping dollar and will prevent a financial crisis. The interest rate alone cannot do that.