Bank of Israel Chief Urges Deficit Fixes Before Growth Slows

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Israel's widening budget deficit should be dealt with before economic growth slows, Bank of Israel Governor Amir Yaron warned, echoing concerns that helped to put his predecessor out of a job.

A mix of rising expenditures and falling tax rates has led “the structural deficit to a level that is undesirable for it to remain at for an extended period,” Yaron said in a letter to the government appended to the central bank's annual report, released Sunday.

In February, Israel's 12-month trailing budget deficit reached 3.5 percent of gross domestic product, above the 2.9 percent target. That growing gap has raised some economists' concerns about the country's fiscal credibility.

Delaying fiscal fixes “could necessitate more significant adjustments precisely when fiscal expansion is needed in order to support activity,” Yaron added in the letter.

Speaking to reporters on Sunday in Jerusalem, he said 2018 had been a good year for the Israeli economy, with balanced growth. However, “gray clouds on the horizon” can't be ignored, he said, and if downgraded forecasts for 2019 global expansion come true, Israel could be damaged.

Yaron's predecessor, Karnit Flug, clashed with Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon over fiscal policy and issued a similar warning last year. Kahlon's office retorted that the Bank of Israel “continues to pursue an economic policy that largely serves vested interests,” and Flug was replaced after one term.

Slower Growth

Kahlon took a more benign view of Yaron's criticism on Sunday, saying he was confident the Finance Ministry would continue to cooperate with the central bank under his leadership. “Any recommendation to strengthen Israel's economy and its social fabric will be adopted,”' the finance minister said in a statement.

Israel's economic growth slowed last year due to worsening trade terms, a decline in residential construction investment and full employment, Yaron also noted, calling for a broad policy to increase productivity. Recommendations included improving education at all levels from infancy, and investing in public transportation.

“The economy is in a good situation because our policy is good,” Netanyahu said Sunday after receiving the annual report. “We reached a unique achievement in which unemployment is at an all-time low and wages are rising rapidly.”

To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Amy Teibel, Mark Williams

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