Economic Retreat Is Worst Since '48, Says Bank of Israel

Fischer presents economic plan.

Bank of Israel governor Stanley Fischer presented a plan to help Israel counter the recession, and took advantage of the occasion to also present a grim picture for the economy this year.

If the plan described yesterday is not adopted, Fischer warned, Israel's economy could face its worst contraction since the state's founding in 1948.

In January, the Bank of Israel predicted that the Israeli gross domestic product would shrink by 0.2% this year. But if the government scorns its recommendations, it's now predicting contraction of 1.5%. It was the fifth time the Bank of Israel had changed its economic growth forecast inside 12 months.

Not that adopting the Bank of Israel plan will entirely solve the dilemma: Even if the government goes with it, the economy will probably contract by 1.1% this year, Fischer said. Unemployment will average 7.3%, whereas if the government scorns the plan, joblessness will rise to an average of 8% this year, peaking beyond that level in the last quarter.

Fischer also forecasts that the government will run a deficit of 5.2% of GDP this year, which far exceeds the government target.

The cost of Fischer's plan is a relatively "modest" - his word - NIS 4.4 billion, partly because of greater state outlay on welfare.

The Bank of Israel's plan is a modest one, Fischer said in his presentation, for two reasons: The national debt relative to GDP is high, and the government deficit in 2009 will be high while tax revenues will shrink. In other words, means are scanty.

Australia can afford to increase its deficit because its debt/GDP ratio is nearing zero, Fischer said, adding: "Israel is not Australia."

Also speaking at the Bank of Israel press conference, the central bank's research chief, Karnit Flug, urged the Finance Ministry to embark on reaching accords with lab leaders over putting public-sector raises on ice, until further notice.

The Bank of Israel plan consists of projects in three areas: labor, industry and export, and physical and human infrastructure.

"Projects" in the area of labor will cost NIS 1.79 billion. These include raising unemployment benefits, extending the term help is provided, and expanding eligibility - in short, making it easier to get help, and providing it for longer. Fischer urges the government to expand the "negative income tax" program, and to reduce the number of foreign workers in Israel.

Plans for industry and exports total NIS 1.15 billion. These include more money to support corporate research and development.

Regarding infrastructure, the Bank of Israel has three projects in mind, at a total cost of NIS 1.5 billion. One is promoting the "Horizon" plan for education, which includes reforming teacher pay. The second is to rehabilitate dilapidated city centers and pursue public transportation plans. A third is to expedite the glacial relocation of army bases from prime properties in central Israel to the south.

The Bank of Israel was deliberate in choosing projects from different areas, Flug elaborated, each of which could easily be accomplished and involve a great deal of manpower, providing jobs mainly among the unskilled workforce - who, by nature of their lower pay, tend to use extra income for consumption.

Given the estimates of higher government expenditure and lower tax revenues, Fischer also urged the government-to-be to defer tax cuts to 2010, and to abolish tax breaks.

Finance Ministry circles said they always consider the advice of the central bank governor, and will continue to do so. In any case, the state has been spending billions on infrastructure, said the ministry sources, pointing to the development of Route 40 in the south and Route 69 in the north.