Remarks by the Governor of the Bank of Israel at the cabinet meeting to approve the expansion of the budget

“The budget increment being discussed today includes a number of important components, particularly: a grant to incentivize the return to employment of workers who were put on unpaid leave or laid off during the crisis; the establishment of a fund to provide credit with significant state guarantees to industries that suffered a particularly severe impact since the beginning of the crisis; and expansion of other credit funds backed by the state.  The cost of these components—which totals more than NIS 10 billion—is a significant part of the overall package, and it is important that they be announced and activated quickly.

 

“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.  There are a number of models, and it is clear that none of them are free of disadvantages, certainly in view of the high level of uncertainty in which the economy finds itself. Therefore, 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 current program joins the previous assistance program that was approved by the government, at a budgetary cost of about NIS 50 billion (including the increase in unemployment benefits due to the crisis).  The cost of these plans, alongside the loss of tax revenue due to the impact on economic activity, are expected to increase the deficit to levels we have not seen for many years, and to markedly increase the debt to GDP ratio.  In recent years, the Bank of Israel has called for strict adherence to a low deficit level that would enable continued stabilization and reduction of the debt to GDP ratio, but 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.  Expanding budgetary expenditure at the current stage will help accelerate the exit from the crisis, and the Bank of Israel therefore supports its approval and implementation.  In addition, we believe that following approval of the program, it will be proper to act cautiously and to avoid additional budgetary expansion for some time, until the implementation of the measures that have already been approved is completed and the extent of their effect becomes clear.

 

“I would like to take this opportunity to say something about the 2021 State Budget, the preparation of which has begun.  This budget will come to you for discussion in the next two months, during the period in which the negative impact to economic activity is deep, and there is tremendous uncertainty regarding the return to activity and the potential of a second wave of corona. It is therefore important that until we are convinced that we have returned to a path of growth and to a proper level of activity, we avoid using contractionary fiscal tools that may have a negative impact on the recovery of the economy.  At the same time, it is important to understand that we are at a high level of deficit, and that once growth becomes entrenched, we must begin a process of reducing the structural deficit and maintaining a responsible fiscal policy so that the debt to GDP ratio can be reduced rapidly and persistently.  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.”​​