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.