Bank of Israel Chief Frowns on Lapid's Plan to Increase Budget Deficit Target

Bank of Israel Governor Stanley Fischer and Finance Minister Yair Lapid reportedly clashed this week over the latter’s proposal to raise the 2013 budget deficit target from 3 percent to 4.2 percent of gross domestic product. Lapid also proposed raising the target for the 2014 budget from 2.75 percent to 3.5 percent of GDP.

Raising the deficit target is likely to harm Israel’s international credit rating and global economic standing and has been firmly opposed by Fischer, who told Lapid that raising the target past 3 percent of GDP was an economically unsound decision, even if the move was temporary.

If Lapid’s proposal is approved by the government, it will significantly reduce expected cuts to government expenditure this year and next, from NIS 30 billion to NIS 17.5 billion. In 2012, the government racked up a budget deficit of NIS 39 billion, equivalent to 4.2 percent of GDP, which provoked public controversy and serious concerns in the markets.

The deficit targets for 2013 and 2014 were already raised in mid-2012 by the outgoing government, from 1.5 percent to 3 percent of GDP. Fischer also opposed the previous change to the deficit target, saying it would seriously harm Israel’s ability to escape an economic crisis if the global economic situation deteriorated further.

Both the Finance Ministry and the Bank of Israel denied any tension between Lapid and Fischer, and said talks had gone well. The Finance Ministry also refused to respond regarding any purported numbers in the new budget. Nevertheless, senior officials in Jerusalem said that relations between Fischer and Lapid have cooled following their argument over the deficit target.

During conversations between senior Finance Ministry and Bank of Israel officials, the latter expressed their concern that Lapid’s primary focus in addressing the budget was chasing tabloid headlines. Finance Ministry officials have also firmly opposed raising the budget deficit in recent ministry discussions.

Prime Minister Benjamin Netanyahu still hasn’t expressed his views regarding budget talks or the deficit target, but budget talks are expected to continue at the Prime Minister’s Office today following the weekly cabinet meeting.