The Governor of the Bank of Israel’s Reference to the Economic Safety Net at the Government Meeting Today in Jerusalem
Behind the numbers and the data, there are people. The policy has to allow a day-to-day routine alongside the virus, and a rapid recovery when we will be able to return the economy to full activity. The economic safety net that has been formulated, with the help of the Bank of Israel as well, will make it easier for employees, the self-employed and small businesses that have been adversely impacted by the crisis to get through the period until the economy recovers. This will be in a manner that will enable them to return more rapidly to business activity and to consume. In that, it essentially extends the “economic bridge” that the economy requires to endure the crisis.
The experience accumulated to date in dealing with the virus indicates that in view of the health-related uncertainty and its ramifications on the ability to maintain an orderly economic life, the adverse impact and the economic uncertainty should be decreased as much as possible for the various players in the economy, in terms of the sundry developments that may still develop. The safety net deals with this issue through direct support as well as by the expansion of guarantees to businesses on the financing side. It is important to carry out the steps decided upon fully and rapidly. Even if there are objections to various components in the plan, the entire system should be enlisted to this. It is important that the current process is accompanied very soon by measures that support demand in the economy as well, and by the creation of a basis for accelerating economic activity and promoting employment and sustained growth.
A plan of this magnitude obviously increases the budget deficit and the public debt. Our assessment is that the estimated potential budget cost of the safety net announced by the Prime Minister and the Minister of Finance is approximately NIS 15 billion in 2020—more than what had been budgeted in previous plans—and about NIS 27 billion in 2021. These amounts do not include the expansion of government-guaranteed credit. It is important to remember that this is a potential cost, assuming that the unemployment rate does not decline below 10 percent. In this case, the deficit could reach 13 percent of GDP this year, and 7 percent in 2021, with a debt to GDP ratio of 76 percent in 2020 and 78 percent at the end of 2021.
However, I want to emphasize—the government has the ability to fund the plan. The financial markets’ trust in Israel’s economy and the government’s commitment to maintaining fiscal discipline, which has been built up over many years, is now working in favor of the Israeli economy and will assist us to endure this crisis with regard to its funding needs. Clearly, when the crisis will ebb there will be a need to deal with the gradual reduction of the debt that has built up, and that will build up even more, during the handling of the crisis.
In this area, we at the Bank of Israel are working with all the tools that are available to us and we have taken unprecedented measures to ensure the orderly functioning of the financial markets and to allow credit terms that are as convenient as possible in the economy. To that end, we are operating a range of policy measures and working to reduce financing costs for the government, the business sector, and households, with an emphasis on operating plans that will assist small and micro businesses as well. The Bank of Israel will continue to do this to the extent necessary, in order to provide a convenient environment for issuing debt and thus to support the government’s budget activity.