`The treasury is blamed for everything'

Nehemia Strasler interviews Finance Minister Silvan Shalom

The lowering of the credit ratings of the two large banks indicates that our economic situation not only is failing to improve, but also is deteriorating.

We've been at war for two years, and this has had a very hard impact on the banks. Besides this, their behavior in extending credit has also contributed to their situation. Just look at the doubtful debt: they are in huge amounts. But the two large banks are still making good earnings. The downgrading of the banks' credit rating indicates that something has happened here, but this doesn't mean that the credit companies will also lower Israel's sovereign rating, because their assessment of the government's economic policies are much more positive than any evaluation here in Israel. But if there is a catastrophic crisis such as a war with Iraq, then Israel's rating will be in danger.

The emergency plan that received so much criticism here was a condition for them. They said that the failure to approve the program would be a negative indication for them. Throughout the entire period, they said `we appreciate' the fact that we didn't raise the spending ceiling, and even if we increased the defense budget, this was done by transfering from one budget item to another.

Have you prepared for the downgrading of Israel's credit rating?

Banks are a central part of the economy, but not the entire economy. There are also other things. Our ability to repay our debts has not been damaged.

Will the public make a run on Israel's currency reserves on a rapid and large scale?

Also in May and June, it was not the public that purchased dollars. Today, with the current interest rates, there is no doubt that there is a great advantage in holding shekels.

So you're not going to meet with credit rating agencies?

We're going to meet with three rating firms during the coming days - some in Washington and some in New York. These meetings are also held on a regular basis. I meet with them every time I come to the United States and every time they come to Israel. We'll present the budget that we've proposed. We plan to pass [the budget] at the end of October. I'll tell them that we'll meet the deficit target for 2002 (3.9 percent) and lower the deficit in 2003 (to 3.0 percent). I'll tell them of the very major reforms in the defense budget and labor market. At this time, while at war, we're reducing defense expenditures by NIS 3 billion, a huge sum. We'll also talk about tax reform, which will reduce tax rates.

Never has a budget been handled better than in 2001 and 2002. This will sound immodest, but the 2001 budget had a growth forecast of 4.5 percent. This, of course, did not happen and we finished the year with -0.9 percent growth. And you have to understand what a drop in revenues results from this. But despite the drop, there was unprecedented fiscal discipline that year and there was no growth in expenditures. It's true that the deficit grew, but we cut back incessantly.

The Bank of Israel issued a document about the national debt growing to 103 percent of gross domestic product and the danger of this leading to a downgrading of Israel's rating.

I advised the governor of the Bank of Israel on more than one occasion that everyone should attend to his own affairs and only publish things that are in his purview. I wouldn't mind if it was only this, but every day I read in the papers criticism from him. But for many months I have unilaterally imposed silence upon myself.

What do you think about not lowering the interest rate this week?

As I told you, I don't intend to comment on the subject of interest. Call it a unilateral ceasefire. I can address this during internal discussions with him, not in public.

But there is mutual hostility and even hatred between the two of you. So, when there is a problem like the Industrial Development Bank, you don't sit together and make a quick decision. Instead, the argument drags on and on, and in the end this causes damage to Israel's economy.

No. There is no hostility or hatred toward him. I think the economic system must work in an integrative way. From the first day, I said that I would cut the budget and maintain fiscal discipline, and you lower the interest rate. This means less government intervention and the release of resources to the private sector. Therefore, this is correct. But he didn't accept this. If both sides are pulling in the same direction [i.e. a tight fiscal policy and high interest rates - N.S.], this doesn't help the economy. [Thus Silvan Shalom suggests that he would have liked to see some interest rate reduction this week. - N.S.]

But in other cases in history, such as the Bank of North America, they sat and in one day solved the problem before it reached the public at large. This was a cooperative effort between the treasury and the Bank of Israel.

The treasury can't be held responsible for everything. After all, the finance minister and treasury do not have authority over the bank. The constitutional authority belongs to other ministers. If the Government Companies Authority were under the treasury, then maybe things would be handled differently. But there are situations in which nobody intervenes, so we handle the problem. [Shalom is referring here to Industry and Trade Minister Dalia Itzik and Prime Minister Ariel Sharon, who are responsible for the Government Companies Authority - N.S.]

But the treasury is blamed for everything. For example, Ephraim Sneh now lays the issue of guards for buses on the finance minister. This was chutzpah. The entire government said that this was chutzpah.

There was the case of the Trade Bank. What was written on the signs? Silvan Shalom. It can't be that only we are responsible for the things that belong to us, but are also responsible for things belonging to others. But I understand. The finance minister and treasury are to blame for everything. Okay. Look, it's a joke. The terror attacks are also the finance minister's fault? Even the terror attacks.

Everyone wants to run away from everything and push everything at the Finance Ministry. I've already learned this. It's always the Finance Ministry. We now have demonstrations at the Finance Ministry in Jerusalem twice a day, and there are also demonstrations outside my house during the weekend.

Will the budget pass its first reading at the end of October?

I really hope it will. You have to understand that the Likud has 19 seats, so we need another 42. The question now is whether the Labor Party will demonstrate national responsibility or not.

So why don't you compromise with them on the Haredim and settlers, also cut their budgets, like you did for the rest of Israel, and soften the blow to those who receive supplemental income?

What they are saying is for political use. It's a joke to shout `settlers and Haredim.' As if the world started today. To say that we didn't make cutbacks with the Haredim? I've become the most hated person there. When you cut 40 percent in child allowances, that's not a blow? When we lowered supplemental income and in the yeshivot, that's not a blow? When we brought an accountant into El Hama'ayan, that's not a blow? For years, they had been trying to do this.

And the settlers?

Here also, tax benefits were decreased for the first time since 1977, by 30 percent.

Why do all of the settlers get free kindergartens? There are people from all levels, including affluent people.

The government decided that they are in a national priority zone and they are in the priority areas.

Doesn't the investment in roads and overpasses in the territories come at the expense of the miserable roads within the Green Line that have no overpasses, tunnels, separation fences or even shoulders?

No. The investments within the Green Line are many times greater. There have never been such large investments in infrastructure in the State of Israel. It's more than during all of the period of [former prime minister Yitzhak] Rabin and Fuad [Defense Minister Benjamin Ben-Eliezer].