Bank of Israel Concerned About State's Massive Budget Deficit

Officials at the Bank of Israel expressed concern last month about the government's fiscal policies in light of last year's NIS 39 billion budget deficit.

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According to minutes of the meeting, which were released Monday, the panel members discussed the uncertainty on the financial front until a new government is formed following the January 22 election, and until a state budget is passed for this year and next.

Nonetheless, the committee members said the latest financial indicators for the economy reflected stabilization of economic activity and a modest improvement in the growth outlook for the next 12 months.

The six committee members expressed the view that, in light of the low unemployment rate, the causes of the budget deficit - which was 4.2% of the country's gross domestic product - are mostly structural in nature rather than the result of a cyclical downturn. Consequently, they require major government spending cuts this year and next in addition to tax increases.

At the end of the committee session, the panel decided unanimously to leave the interest rate for February unchanged at 1.75%.

The central bank officials are of the view that even though Israel's debt-to-GDP ratio remains stable and is not higher than that of many developed countries, the country's debt burden is higher than those countries because the Israeli government pays a relatively high rate of interest on government debt.

Monetary committee members noted the continued strengthening of the shekel, and expressed the view that once major production of natural gas from Israel's offshore drilling sites begins later this year, gas would increase Israel's current account surplus and also act to bolster the shekel's value over the coming year.

The size of the effect would depend on the extent to which this information has already been factored into the prevailing exchange rate.

The Bank of Israel's monetary committee is chaired by central bank governor Stanley Fischer. The other five members include officials from the Bank of Israel in addition to members of teh public.