Flug Fingers “Unconventional Tools” to Spark Economy


The Bank of Israel will not hesitate to use all means at its disposable to energize the economy, bank governor Karnit Flug declared at a press conference marking the annual report for 2014.

“There are other tools on the table, and we may have to use them,” Flug said.

“We are not eager to use unconventional tools, but if the conditions required their use emerge, we won’t hesitate to do so,” she said, citing Israel’s relatively poor productivity compared to other Western countries.

In particular, Flug said the country’s public transportation and infrastructure investments need a boost, and that the regulatory system needs streamlining.

Firing an early shot in the coming battle over regulatory reform, Flug let known her opposition to the presumptive Minister of Finance Moshe Kahlon’s plans for consolidation of supervisors in the financial sector, including removal of the banking supervision department from BOI control.

“The experience in the most recent crisis taught us that there is a big advantage in having banking supervision within the central bank. We saw the experience of the UK, where supervision was taken away from the central bank, and then returned to it. There is no one model that fits all economies. I see a great advantage in having banking supervision within the central bank, and the lessons from the crisis point in this direction,” Flug said.

Concerning the cost of living, Flug conceded that “our prices are a little higher than what we would expect, given the per capita GDP in Israel in comparison with the rest of the world.”

But she rejected the Shas party’s proposal for a VAT exemption on basic products, saying that differential VAT is “not an effective way of dealing with income distribution. It comes with a high cost, and when products are taken out of the uniform VAT, it is a slippery slope. General price controls are also not an effective method.” Instead, she recommended promoting competition as a way to bring prices down.

To bring down housing prices, Flug agreed with Kahlon that the answer lies in  increasing the supply of land for housing. “Keep in mind that the government controls the supply of land and the planning process, and it therefore plays a key role,” she said.