Bank of Israel Governor Stanley Fischer said Israel shouldn’t widen its budget deficit to pay for any increase in military spending, and warned of the risks of “populism” before elections due by next year.
There is increasing pressure from defense officials to boost expenditure, Fischer said in a phone interview on March 30. Extra defense spending of as much as 3 billion shekels ($807 million) could possibly be financed through cuts in other outlays, while an increase of 5 or 6 billion shekels would be “very hard” to accommodate within the current framework, and would require a tax increase, he said.
Prime Minister Benjamin Netanyahu is under pressure to expand his budget. Geopolitical changes such as the fall of Israeli ally Hosni Mubarak in Egypt, and tension over Iran’s nuclear program, have brought calls for higher defense spending. Mass protests last year over living standards are drawing more money into social welfare and education, while slowing growth is expected to reduce tax receipts.
Israel has outperformed most developed economies since the global crisis that began in 2008. Still, gross domestic product growth will probably slow to 3.1 percent this year from 4.7 percent in 2011, the central bank forecast on March 26.
The budget deficit will probably be between 3 percent and 3.5 percent of GDP this year and next, and the government won’t cut spending as long as it remains below 4 percent, Finance Minister Yuval Steinitz said in a March 22 interview.
While the government has acted responsibly until now by staying within budget restrictions, the country can’t afford a spending spree motivated by elections, which in any case may not help an incumbent government, Fischer said.
“Governments that do tough but essential things in election years are rewarded for doing so,” he said. “It’s not always the case that the guys who cut taxes 10 minutes before elections come out ahead.”
Planning for Israel’s next budget, which may cover 2013 and 2014, will probably begin next month. Elections are due by November 2013.
“Populism is the illusion that there are free lunches all over the place and that you can increase spending without a funding source and not suffer serious consequences,” Fischer said. “This approach to policy almost always ends in trouble.”
Fischer also said that poverty in Israel has declined in the last two years after a long period of increases. The Bank of Israel annual report, released last week, traces the decline in poverty and income inequality to an increase in labor participation and lower unemployment.
“We finally seem to have more people going to work,” Fischer said. “If we can maintain those trends, we are well on the way to dealing with poverty.”
Netanyahu announced last night that a tax on gasoline will increase by less than planned to ease the burden on consumers. That will be paid for through an efficiency program for government ministries, the prime minister’s office said in a text message.
As a result of Netanyahu’s decision, the price of gasoline rose by 0.05 shekel per liter, instead of 0.20 shekel, according to the statement. A liter of 95 octane gasoline will now sell for 7.79 shekels, the Energy Ministry said in an e-mail late yesterday.
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