BoI Gov: Big Spending Without New Taxes for Now

Governor of the Bank of Israel Prof. Amir Yaron advised the cabinet on Monday that any discussion of a raise in taxes should be postponed for the 2022 budget, Globes reported.

Yaron told the ministers: “We must avoid using contractionary fiscal tools that may have a negative impact on the recovery of the economy. The timing of the change in policy direction depends on developments in the coming months, and the process of updating the 2021 budget at the time of approving the 2022 budget, which is planned for the beginning of 2021, may be an appropriate point to start such a process,” a reference to narrowing the budget deficit.

Regarding a proposal for an additional emergency budget of NIS 14 billion to be added to the NIS 50 billion in expenditure already approved as part of the government’s NIS 80 billion economic rescue plan, Yaron urged swift action.

Taking a swipe at the Finance Ministry’s reluctance to back the plan wholeheartedly, Yaron said “opening businesses and accelerating processes to reduce unemployment are an important part of the exit strategy from the crisis, and the more rapidly employees return to work, the more the risk of a continued impact on the economy will decline.”

“If there are reservations regarding details of any model, the most important thing at the current time is speed of performance and reduction of uncertainty. The details of the plan must be announced immediately, and it must be activated quickly even if its arrangements are not perfect. The chances that the model that is implemented will succeed in contributing to employment will be greater the faster it is announced and implemented,” the governor was quoted by Globes as saying.

The additional budget is meant to finance NIS 6 billion in grants to encourage companies to bring back employees who have been laid off during the crisis and to establish a NIS 4 billion fund to provide credit guarantees to sectors hit hardest by the crisis as well as to expand other credit guarantee funds.

Yaron acknowledged that such spending would set back years of efforts to curb the state deficit, but he said, “the crisis created a new reality in which it is correct to temporarily increase the deficit and debt in order to prevent prolonged damage to the economy due to the negative impact on households and on businesses’ survival.”

Also on Monday, the Bank of Israel Monetary Committee, headed by Yaron, has left the interest rate unchanged at 0.1%, after cutting it from 0.25% last month.

In an updated forecast, the BoI’s research department said it now expects GDP to contract by 4.5% in 2020, compared with 5.3% in the April forecast, and to grow by 6.8% in 2021, compared with 8.7% in the April forecast. The inflation rate in 2020 is expected to be -0.5% (compared with -0.8% in the April forecast), and in 2021, it is expected to total 0.7% (compared with 0.9% in the April forecast).

On its interest rate decision, the Bank of Israel said, “The coronavirus crisis has led to an unprecedented contraction in the scope of economic activity and to a steep increase in the number of jobseekers. The gradual process of removing the restrictions that the government imposed on movement and activity is beginning to be reflected in economic activity, though the adverse impact on the economy is still considerable and is expected to persist.”

The Bank of Israel expects the interest rate in a year (the second quarter of 2021) to be in the 0-0.1% range.