Remarks by the Bank of Israel Governor at the cabinet meeting, September 21, 2020
Bank of Israel Governor Prof. Amir Yaron participated in yesterday’s cabinet meeting. The following are the points he raised during the discussion:
The new morbidity wave in which we find ourselves is having a detrimental impact on economic activity and on employment. The worsening health situation has led the government to decide on making the restrictions on economic activity more stringent, including the closure of many businesses. Alongside this, the concern over morbidity, the impact to the income of many families, and concerns over the worsening healthcare and economic situation in the future are also causing households to lower their consumption, and businesses to reduce their investments.
The economic assistance program presented to the government for approval today is an important and helpful step that will assist businesses in getting through the closure and being prepared to increase their activity and employment once the morbidity levels subside. The program was formulated through joint work by the Ministry of Finance, the Bank of Israel, and the National Economic Council, and is a further element in the safety net that the government put in place a number of weeks ago, and that includes assistance to businesses that have been seriously impacted during the crisis and to workers that have lost their jobs.
The program presented today includes a new and important element: an “employee retention” grant, the purpose of which is to provide incentives to employers to maintain a high level of employment even when the business’s income has been temporarily reduced. This will minimize the impact to employees’ wages and economic activity, while also reducing unemployment benefit payments. The grant is part of a broader strategic vision that aims to maintain businesses’ abilities to rapidly accelerate their operations once morbidity is reined in. While the grant is currently ensured only for a month and a half, the Minister of Finance’s announcement of his readiness to extend it based on the development of the morbidity situation and the state of the economy, as was also written in the explanatory notes to the decision, will increase the grant’s effect on employers’ decisions even now. Making the criteria for direct assistance to businesses within the existing programs more flexible, and expanding the sources of credit and liquidity for businesses, also support this objective. It is particularly important to lower the threshold of decline in activity that entitles businesses to support grants from 40 percent to 25 percent.
The important policy measures presented today have a budgetary cost, and the government must approve a further expansion of the special budgetary framework to deal with COVID in 2020 and 2021 in respect of this. During a period of such significant shocks to the economy and the application of a further closure, there is a structural difficulty in precisely assessing the cost of these measures, but experience since the beginning of the crisis shows that the actual costs of some of the programs that have been approved thus far—particularly those in the area of assistance to businesses—were lower than what was budgeted. The responsibility for determining the expected costs of the various programs lies with the Ministry of Finance, but it is important that if it turns out afterward that the costs of the existing programs and those presented today are lower than expected, the surplus amounts are not allocated to other targets without an in-depth discussion. By its nature, the safety net allocates sources for risks that don’t necessarily come to realization, and insofar as this occurs, we must act cautiously with the sources that are not utilized.
Even in the midst of the crisis, and particularly at the start of the new year, it is important to look beyond the horizon. For this reason, it is more important than even to accompany the assistance programs as quickly as possible with a budget that will include long-term growth-supporting measures and will be based on increasing productivity in the economy. An increasing number of advanced economies have already presented such programs, and others are being formulated as we speak. Such a program will provide hope and a planning horizon for businesses, and will help get the wheels of the economy and of employment moving in the near future.