Jerusalem, 21 November 2001
Press Briefing with Finance Ministry Director-General Ohad Marani
(Communicated by the Government Press Office)
The GPO on Wednesday, November 21, 2001, sponsored a briefing for the
foreign press by Finance Ministry Director-General Ohad Marani.
Following is a transcript of his remarks:
"Let's start with the budget. We already submitted the 2002 budget to
the Knesset. It already passed the first reading quite successfully,
including all the accompanying laws, so the various laws that deal
with not only the budget but the economic system, some reforms, etc.,
so we already passed this budget on the first reading. Now we have
the tough job dealing with the Finance Committee and then concluding
passing the budget on its second and third readings within the
Knesset. It's not going to be easy this year despite the broad
coalition because some of the parties, some of the members of the
coalition, object to some of the proposals or very central items in
this budget, especially the cutting of some of the social security
benefits and some other issues.
We have some dilemmas about 2002 and I would elaborate on it later
on. But let's get back for a minute to the year 2001. 2001 has been
a very difficult year to the Israeli economy. We face, and we are
still facing, a lot of problems. Most of them are problems that are
indigenous to the Israeli economic policy making, mainly the
continuation of the security in the region, now also in the Western
world. We don't need to talk too much about September 11, about the
American operation in Afghanistan, but of course it had a major
impact on the Israeli economy.
The first industry that suffered, and is still suffering, is the
tourism industry in Israel. Today, the shock of this industry is seen
in a 50-60% drop in tourism to Israel. Exports are also not going as
we expected them to go. It's also true about economic growth and this
because of the recession in Western markets, of the high-tech
industry, the situation on NASDAQ and other exchanges. Israel is very
much a high-tech oriented economy so of course it has big
implications for the Israeli economy. GDP growth in 2001 is going to
be around 0.5%. Of course this is much less than the expected 4.5%
that was the original figure for 2001, and this is a real
slowdown.
Now, of course, because of the security situation, because of the
intifada, we have much less exports to the Palestinian economy in
2001. It might stay the same in 2002. Of course, less Palestinians
are employed in Israel in the last year. So that is the downside of
the economic situation in 2001.
The upside of the situation in 2001 is the following: First, we
proved that we can deal with very major problems across the board. We
covered everything: security, budget, slowdown, everything. So we
proved that we can deal with it without increasing overall outlays
and without making any major economic mistakes, and without getting
into an economic or financial crisis. So that is a big difference
between Israel in 2001 and the Israeli economy at the beginning of
the 1980s, for example. Now, we don't have any crisis. Of course, we
have the slowdown in the economy, but this is a must in the current
situation. So this proved that the system of economic decision making
is much better in Israel and it also proved that the basics of the
Israeli economy are much better than it was before and we can deal
with these problems. The high-tech industry is quite strong. The
other industries are also in good shape and we can absorb these
shocks with some problems but not with crises.
I'd like to talk a little bit more about security needs. Security
needs and budgets were much bigger this year and we passed a budget
cut across the board, talking about the government budget, about the
civilian ministries, so we just diverted a lot of budgets from the
civilian ministries to the Defense Ministry just to assist the
defense systems in dealing with the security needs. We did it quite
successfully I believe. What we did was just diverting budgets from
civilian ministries to the security system. We didn't do, or we
didn't take some measures that we didn't want to take despite some
pressures to do it and what we didn't do is to increase taxes and we
resisted a lot of pressure to raise taxes instead of cutting the
budget. We didn't do it because we believed, and we still believe,
that this is a very negative move when we are facing a slowdown.
Generally speaking, I am very reluctant to increase taxes in Israel
because we need to cut taxes. Even in this difficult year, we didn't
increase taxes. We found ways to fund these needs without raising
taxes. I believe that this is good news. It's also about some special
financial arrangements, we didn't need any kind of compulsory loans
from the public. We just diverted funds from the civilian ministries
to the security system.
The actual budget deficit is going to be much higher in 2001 than the
target deficit. It's going to be around 2.8-2.9% of GDP. It's still
hard to tell the exact figure and the reason for the difference is
coming only from the revenue side and not from the expenditure side.
The expenditure side was quite effectively disciplined by the
treasury but the revenue side is down and this is because of the
slowdown in the economy and there is nothing to do about it so we
suffered a bigger deficit this year. We didn't pay for it with a high
inflation rate. The public and the business sector see the situation
as a temporary slowdown and not as a major decision of the government
to increase the deficit for years to come. So that's the deficit for
2001.
Talking about the year 2002, this is the budget that just passed its
first reading in the Knesset, we had a dilemma what GDP growth would
be for 2002. When we prepared the budget four months ago, the best
forecasts we had were around 4% or a little more and we decided to
assume 4% economic growth in 2002. In these very last days, it seems
much harder to achieve this rate of economic growth in 2002. But it's
still possible to achieve this rate of growth but it looks less
probable; it's still probable but the chances are lower than they
were a few months ago.
It's a little bit complicated and its hard to explain it, but we
believe that we can still achieve this rate of growth because many of
the outside shocks that we faced this year in 2001 are not going
to be, let's say, as severe as they were this year. For example, we
don't expect tourism to go down more than it went down this year. We
don't expect exports to the Western economies to decrease more than
it decreased this year. We don't expect the Israeli exports to the
Palestinian Authority, for example, to be lower than it was this year
because it has already reached the lowest level that it can reach.
It's only the very basic exports now and this is true about many
other things so it's not only a matter of the economic cycle, it's
also a matter of the current level, which is very low in many areas
of the economy, ao we don't expect it to go lower. And if we don't
expect any other shocks, we have a reason to believe that even if the
situation would still be hard in this regards, we can achieve a much
higher rate of growth because the potential, let's say the long-term
potential for economic growth in the Israeli economy is somewhere
between 4.5-5.0% per annum.
I'm talking about real growth. So if everything would stay as it is
now, but we won't suffer any bigger shocks, we can still reach
economic growth and we believe that we can reach 4% growth. Of
course, it can be lower, no doubt about it. We are watching it very
carefully, watching the economic picture, watching the important
industries, of course watching revenues. And again, we have a very
good control over the budget, over the outlays, we don't have any
control of the revenues. Of course, it might fluctuate and it depends
very much on the economy, depends very much on the way of getting out
of this slowdown.
We changed the deficit target for 2002 from the initial deficit law
and we increased it to the level of 2.4% of GDP instead of having
smaller figures. So we took this decision because it was really hard
to plan a lower deficit target for 2002. We believed, and we still
believe, that under the current situation, we should stabilize the
economy and we should have some expansionary budget in the right
figures, neither too big nor too small, and we tried to stabilize the
economy, not to cut the budget too much during this year of
slowdown.
And we tried to stimulate the economy in 2002. We tried to increase
the budget for investments in infrastructure, mainly in
transportation, but also in water and sewage systems, and the train
systems. We believe that the major level of economic growth in 2002
should be investments in infrastructure. In other areas, some
potential locomotives are the high-tech industry and also the tourism
industry. We don't expect these industries to give a real boost to
the economy in 2002 because of the situation in these industries.
It's hard to have more tourists coming into Israel under the current
situation, under the security situation. It's even harder after
September 11. People are quite reluctant to travel too much, not only
to Israel but also to other parts of the world. So we don't expect
too much from the tourism industry in 2002. We decided about some
assistance to the tourism industry to survive in this difficult year
or maybe two years, but again, we don't think that we'll have any
good news in this industry in the next quarter, or maybe the next
year. The high-tech industry is not in very good shape but this is
not because of the Israeli industry, this is because of the shape of
this industry all over the world and the markets for the Israeli
high-tech industry, the western markets of course, and we have
suffered from the slowdown in these industries.
Talking about labor, the unions, the strikes in Israel now, this is
one of the major problems that we are facing now and I will elaborate
a little about the 'package deal' that we are trying to shape now. We
are facing a lot of strikes, a lot of problems with the unions. It's
true about the Histadrut, the umbrella organization of the unions,
and it's true about the local unions of each authority or ministry.
It's really hard to understand it. It doesn't make sense to increase
government or public sector salaries this year, a very difficult year
for the economy. And the business sector is downsizing. The business
sector is going through lay-offs, through salary cuts, and I believe
that they have adjusted quite well to the economic situation.
This is not true about the government and the public sector. Instead
of cutting salaries, this is very hard to do in the government
sector, we are facing real pressure to increase salaries. Of course,
we can't afford it. It might be a major mistake to increase salaries
within the government and public sectors this year because we have a
very big gap between economic growth and growth in salary
expenditures. We can't increase any more this gap. It's a great
source of tension now. We had two strikes that we believe we should
have concluded and they were concluded quite successfully from our
standpoint, the strike at the seaports and the strike of the customs.
The reason that put a lot of pressure to conclude these strikes was
that this was a real burden on the economy. The industry got hurt
because these two systems deal with the import of goods and raw
materials, and the exports of the Israeli economy, of the Israeli
industry. These strikes are over but we have a lot of other strikes,
a series of strikes. But I believe that we are going to be very
determined about it. We are going to be quite tough with these
strikes because we can't let it continue and we can't pay anymore
money this year for these sectors.
The package deal is a real challenge. We are trying to deal with the
current situation. It's not the same, of course, like the package
deal that took place in Israel in 1985 because the situation is
completely different now. We don't have a hyperinflation. We don't
have a major problem with the current account deficit or with various
industries.
We have three problems that we are trying to deal with. In the fiscal
problem, the deficit is higher because of the slowdown in the
economy. We have a problem in the labor markets. The unions are too
eager to get salary increases and of course we have a lot of strikes.
And the third one is about the fear that unemployment might grow if
we won't deal with it but still we are not suffering a very high rate
of unemployment. In Israeli terms, it's quite the average rate of the
last year. It's still fluctuating between 8.6-8.9%, which is not too
high in the Israeli system, especially since part of this
unemployment is not real unemployment and we have a very generous
system of social security benefits and allowances. So the idea is to
try to reach some agreement with the unions, and with the employers,
and of course the government and the central bank about designing
some growth policy to deal with these problems, to deal with these
challenges. The idea is to try and design a package that would
include some freeze on government and public sector salaries and to
try to look at the longer cycle, not only this fiscal year, but maybe
to look at a three-year cycle, and then to decide that we are going
to freeze salaries for the initial year or two of this cycle and to
pay the increments in the third year when the economy will be in much
better shape and it will be possible to pay, and then we can deal
with these problems. We'll deal with the fiscal problem.
We'll deal with the very struggling labor markets and we'll deal also
with the issue of what we are going to give or promise to the unions.
It's quite clear that if we want them to agree to freezing salary
increments this year, we should promise something for the following
years so this is the main idea. We are just thinking about tax cuts,
just checking some possibilities and some alternatives. The idea is
to cut some income taxes to give some boost to the economy and also
to compensate some part of the employees for the salary freeze. But
it's not easy and we can't give a very substantial tax cut because of
the fiscal situation so basically this is the current situation.
We believe that 2002 is the highest rate of uncertainty that we have
faced in the last decade. But 2002 can be a very good year. It can
also be a very bad year. It depends a lot on some issues that we
don't have big control over them. It depends on the world economy,
world and regional security, it depends on the regional economy. We
don't have too much control over these issues. We have real control
over the fiscal policy. We have some control over economic policy. It
is the responsibility of the government to make the right decisions
but the other issues are wide open and we don't have any good guess
about the world this year. So this is a year of great opportunity to
achieve economic growth but this is also a year with a lot of
freezes. We don't know if we'll adjust the 2002 budget or not. We
decided to be very, let's say, very alert to economic developments
and we'll adjust and monitor things very carefully and if we'll
decide that there are strong reasons to change the budget, we'll
change and adjust it of course.
Now about the economic growth forecasts. We don't change them because
we see that nothing happened or that we don't need to change it, we
just don't deal with it now. We don't deal too much with forecasts.
We deal with it mainly one time a year when we prepare the budget for
the following year and we did it a few months ago. What bothers us is
whether we should change the overall budget as a result of changes
and potential change next year in economic growth, in the revenue
side. We haven't reached any conclusions yet. Even if we'll have a 2%
slowdown, or GDP growth is slower by 2% than the initial forecast, we
can adjust some portions of the budget. We can deal with it. We don't
think we should change the whole budget for that, we can deal with
some items, and we don't think that we should cut the budget across
the board without any priorities. If we face this situation, we'll
cut some segments of the budget much more than others and the idea is
to try to be efficient, to try to identify those parts of the budget
which contribute much more to economic growth than others, and of
course to cut accordingly. We don't want to cut investments in
infrastructure but I believe that we have a lot of room to cut our
social security system, especially allowances that don't contribute
to the willingness of some of the Israeli population to work, to get
into the working part of the Israeli economy. I believe that if we
need to cut it, we'll cut it and the Knesset will approve it. It's
not easy at all to pass these bills.