Pandemic Policy Now Is About Spending Smart, Not Spending Big, Bank of Israel Chief Says

In an interview with TheMarker, Amir Yaron warns that as debt ratio grows, Israel must show more fiscal caution. He worries about what will happen to the economy this winter

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Bank of Israel Governor Amir Yaron is seen in an undated photo.
Bank of Israel Governor Amir Yaron is seen in an undated photo.Credit: Eyal Toueg

The last 10 days haven’t been easy for Bank of Israel Governor Amir Yaron: For the first time since he was appointed 18 months ago, a serious rift has developed between him and Prime Minister Benjamin Netanyahu.

Prof. Avi Simhon, the head of the National Economic Council and the economic adviser considered closest to Netanyahu, raised the idea of sending a check to each and every Israeli citizen, as had been done around Passover, but on a much larger scale. Netanyahu liked the idea as a way of getting money into people’s hands quickly after the aid promised to the self-employed and businesses got entangled in red tape.

The prime minister knew Yaron would be opposed and didn’t give him advance notice before he announced it July 15, even though it is expected to cost the government 6.5 billion shekels ($1.9 billion).

Treasury budget chief Shaul Meridor was quoted as saying Israel the grant program would turn Israel into “Venezuela” and central bank officials warned that the move might endanger Israel’s credit rating. Like his predecessors, Yaron weighs his words carefully, but his opposition is clear. “It would have been better if the grants had been targeted and smaller,” he said a day after the plan was unveiled.

In an interview with TheMarker, which is excerpted below, Yaron added: “If we’re going into a lockdown, it’s not clear that this the best time [for the grant]. Its impact might be stronger after we re-open the economy.”

A bar stands closed due to the coronavirus restrictions, Tel Aviv, April 12, 2020Credit: Tomer Appelbaum

At a meeting of the cabinet last week, where the grant was discussed, Yaron noted that many Israelis have continued to work during the coronavirus crisis and don’t need aid urgently. They are likely to put the money in a bank account, which won’t give a lift to the economy, especially to stores and restaurants.

The cabinet listened to your presentation and still approved the grant proposal.

“They saw and understood it.”

But they still approved spending billions?

“After it was approved, the program was adjusted and now the grant will to a degree be based on income.

“Put it this way: There were a series of discussions, we offered our insights and in the end the prime minister has to make a decision. I assume he gave great weight to the timing. I understand that. In many other contexts, we would also like some of the fiscal aid to be delivered faster.”

There is a feeling that you are too cautious in critiquing the government.

“I have expressed myself clearly on several occasions.”

Comprehensive plan

Perhaps at a time when we’re grappling with an unprecedented crisis and new ministers have been appointed, the Bank of Israel – and you personally – need to act as a guiding light? Maybe we need an authoritative figure of international standing to design an economic plan of the kind we haven’t seen so far?

“The Bank of Israel is very much involved and is at the table in an advisory and fiscal capacity. We have brought plans and join most of the deliberations.”

And what if we go into an election?

“As long as it is clear that the coronavirus crisis is with us, as well as its economic effects, we need to act in a systematic, planned and sustained manner to reduce the economic and health uncertainty. Going into an election will only strengthen the uncertainty and make it harder to take the systematic measures that we need.”

Yaron admits he doesn’t get much sleep these days. He goes to bed at 1 A.M., gets up at 6 A.M. and in between awakens once or twice during the night. He goes over and over the decisions he’s made and the ones he will have to make. “My brain is working all the time. I start the day without knowing how it will end.”

What worries you the most right now?

A second wave and its effect on business and the economy. Unemployment. After all, crises like these can have a negative multiplier effect. We need to administer the medicine early so we don’t reach that point.”

What did you think when you see the protests against the government’s coronavirus policies?

“When there are a million unemployed and on unpaid leave, businesses are closing, owners for whom their business were their home, you can’t be apathetic. It’s happening right in front of me. On the other hand, you have to understand that the government can’t solve everyone’s problems. All it can do is provide aid and a bridge as best it can and within the constraints of the budget.”

If we are heading for an election, do you believe that the current political leadership can restrain itself?

“The government doesn’t have an open checkbook. Even as they are spending more money on the crisis, decision-makers have to understand that they aren’t on a highway with no speed limit.”

For every government body willing to listen, the Bank of Israel has offered alternative plans for creating demand that would contribute a lot more to the economy, compared to the grant. One of the more interesting ideas is to increase demand by issuing vouchers to consumers instead of depositing money into their bank accounts.

“At the start of the crisis, spending at supermarkets and pharmacies grew quickly while everything else dropped,” says Yaron. “In recent days we’ve been seeing a renewed rise in [spending on] food and pharmaceuticals. So, if the grocers and drug store chains aren’t hurting, we should direct spending to other sectors like furniture and apparel, or tourism. If we issued vouchers as they have in South Korea and Japan we could direct money not only to those who need it but to specific business sectors.”

So, the key to exiting the crisis is increasing consumer spending?

“Yes, and investment. We want to convert savings into consumption and investment.”

Illustration of the Tel Aviv light rail, due to open in 2021, December 18, 2016.Credit: NTA - Metropolitan Mass Transit System Ltd.

Investment takes time. To build a metro for greater Tel Aviv will take 15 years.

“We don’t have to wait for the metro. For hotels that are closed now this is a great time to undertake renovations. And, if we want to reduce crowding on the buses, we can use buses that had been used for tourists and are standing idle right now.”

Cold calculations

How will this enable us to get through the winter?

“The winter is a big mystery. We still have some ammunition left, but every million shekels of public money – and all the more so, every billion shekels – comes at great cost. As long as the ratio of [public] debt to gross domestic predict is rising, we have to manage the risk, to offer targeted aid and be aware that we may need more ammunition in the winter. We can’t increase spending and deficit without limit.”

With the encouragement of the Bank of Israel, the government lowered Israel’s debt over the last two decades to 60% of GDP, a figure once considered a distant dream. But the coronavirus crisis has changed everything: Israel’s debt is now forecast to climb to 78% of GDP by the end of the year. The grant alone with add 0.5 percentage point.

What bothers the Bank of Israel government isn’t just the size of the debt but its quality. “Another one percentage point isn’t what’s going to move the markets, provided that we act systematically, that we have a structured plan and that we work in a focused way,” he says. “By the end of the year, Germany’s debt is expected to be similar to Israel’s at about 77%. But Israel isn’t Germany.”

Yaron’s current warnings stand in contrast to what he was saying four months ago. In March and April, he was telling the cabinet in closed meetings to step up government aid. The situation now is different, he says.

“Originally we thought that the [economic] recovery would be a V and that we needed to build a bridge to get us to June 2020. Now we need to think in terms of getting through to June 2021. There will be businesses closing and there will be people who become long-term unemployed.

“I hope that there will be a vaccine in 2021 and the more wisely we invest money the better shape we will exit the crisis.”

Until he accepted the post of governor, Israeli-born Yaron had lived the charmed life of an academic in the U.S. for 25 years, most recently on the faculty of the University of Pennsylvania’s Wharton School. In the first year after he returned to Israel as governor, most economists saw few clouds on the economic horizon. No one could have imagined 2020 would quickly descend into an unprecedented global health and economic crisis.

Early in the pandemic, Yaron went into quarantine after coming into contact with Health Minister Yaakov Litzman, who was diagnosed as a carrier. He then had to deal with a near-absent finance minister, Moshe Kahlon, who was sitting out the final days of his term in office. Yaron also had to contend with a caretaker government with limited powers and no 2020 budget as Israel held three back-to-back elections. He hasn’t taken a vacation since he took office.

“March 14, a day I will never forget, people stormed the ATMs,” he recalls. The central bank had to intervene to ensure there was enough cash circulating.”

Are the policy decisions the government is taking being done in an orderly way?

“The security net we decided on is an important measure that created certainty in a world of great uncertainty. That was one layer and it was established quickly. The next step, which is needed now, is to increase demand and accelerate activity, perhaps even restore economic growth – it doesn’t have to be done immediately. We can stop for a minute and think about how to do it correctly, though we don’t want to delay this for months either.”

Chaos at the top?

But is it being done in an orderly way? What about the saga of the coronavirus czar, the grant or closing restaurants and pools?

“For measures to be economically effective, there has to be a light at the end of the tunnel in terms of health,” Yaron says, avoiding an answer to the question. “We need to flatten the curve and establish ways for conducting ourselves after we succeed in doing so. Even the prime minister has said that we probably left [the lockdown] too quickly.”

Israel still has no budget for 2020 and Netanyahu and Alternate Prime Minister Benny Gantz are in a standoff over whether the government should enact one for 2020 alone or for the rest of 2020 and all of 2021. The government has until August 24 to pass a 2020 budget or fall.

Why won’t you as governor stand up and say it can’t be that at a time of crisis Israel won’t have a budget by August?

“We need a 2020 budget firstly for ‘mechanical’ reasons – to free what’s been stuck. Without entering into any other issue involved with it, I hope it will be legislated as quickly as possible. The Economic Arrangements Law is more or less ready – they simply need to move forward with it. A quick budget is important.”

Is there any sense is passing a budget just for 2020, in other words, a budget that will be in effect for just four months?

“We still don’t know how 2021 will look. If we once thought it would be characterized by fast economic growth and that we could possibly reduce spending, that doesn’t any longer seem to be the case. We may even have to expand it. Therefore, it’s better that decisions regarding 2021 are taken as close as possible to next year. We could do a basic budget for 2021 and adjust it later, but in any case it’s best that there be a 2020 budget as soon as possible.”

The interest rate on 10-year Israeli government bonds is currently 0.65%. Prof. Simhon hinted recently that so long as rates are so low, Israel can borrow as much money as it needs. Around the world governments are spending more. Are there really no limits to spending any more?

“That’s certainly not true. We are in a low interest rate environment that enables increased budgetary spending, but if the government sends the message that there are no limits on spending and spends money on irrelevancies, interest rates won’t stay at their current levels because the credit rating agencies won’t look at this as proper long-term behavior. Right now, the markets trust us because they understand that the financial aid we have been giving is at about the same level as elsewhere in the world.”

It isn’t less than elsewhere?

“Regarding lending, it is smaller and now we’re raising the level of state-guaranteed loans. In other areas we are more or less where other countries are.”

There’s no risk in the foreseeable future that Israel’s credit rating will be lowered?

“Markets don’t work in a linear fashion,” Yaron says, hinting that the 6.5 billion shekel aid program won’t be looked at the same way as other measures the government has taken.

“You need to remember this. So long as we are seen as acting reasonably and responsibly, the markets will support us. But we need to behave differently the more money we spend. When you’re at a debt-to-GDP ratio of 80%, your degree of freedom is lower than at 60% and the effectiveness of every measure you take needs to be made more clear.”

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