The ink was hardly dry on the most recent economic plan when
then Israeli government announced that it would present a new
one in a month. However, the old plan refers to the current
year, and the new plan applies mostly to the next fiscal
year.
On Monday, Prime Minister Ariel Sharon suddenly announced the
cancellation of a scheduled cabinet meeting on Thursday to
debate a NIS 2 billion transfer in spending to infrastructure
projects. Instead he told Finance Minister Silvan Shalom and
his staff to prepare budget adjustments and cuts for 2003,
expected to total some NIS 5.7b.
"I have instructed the Treasury's senior staff to prepare,
within 30 days, a plan to be brought before the government
that will include all the adjustments for 2002 and 2003 so
the budget deficit in 2002 will not rise above 3.9 percent of
gross domestic product as set by the government, and in 2003
will not rise above 3 percent of GDP," Sharon told ministers
and journalists.
On Monday cabinet ministers cut government spending by NIS
500 million, and completed budget adjustments related to the
NIS 13b. economic package approved just a few weeks ago.
These measures are expected to keep the budget deficit around
3.9 percent of the GDP of the current year. However, they are
not enough to lower next year's deficit to 3 percent of
GDP.
Sharon further announced that the Treasury's economic plan
for 2003 will add NIS 1b. per year in each of the next five
years to infrastructure investments for economic stimulation,
above the normal infrastructure budget of NIS 4b.
"I have also ordered that everything be done to continue
cutting government spending, beyond the NIS 2b. decided upon
last Thursday, in order to raise the needed funds for
infrastructure projects that support growth," added Sharon.
However, no additional cuts are expected in this year's
spending.
He told coalition leaders that the Treasury plan will include
job creation programs, and will take steps to increase the
willingness of Israelis to work.
Last week Sharon, Finance Minister Shalom and Bank of Israel
Governor David Klein held a "summit" meeting to discuss
Israel's economic present and future. The result of that
meeting seems to have been a recognition of the importance of
fiscal discipline for Israel. Only if Israel sets clear goals
for the budget deficit -- and firmly meets them -- will it
maintain credibility and enjoy the confidence of
international financial markets. The first plan, passed a few
weeks ago, fell far short of the mark.
Israel is very dependent on global financial markets for
general finance and to fund the many ideas that Israeli
inventors have. It has suffered greatly from the general
slowdown in venture capital financing.
Though Klein has done what he could to restore discipline by
raising interest rates sharply, his effectiveness is limited
if it is not accompanied by cutbacks in government spending
and hopefully also diversion of government resources from
consumption to investment by spending on infrastructure.
Economists agree that Israel's infrastructure has been
neglected to the point that even relatively small investments
in it could bring big returns.
One measure of the markets' assessment of Israeli government
intentions is the price of the dollar in shekels. It has shot
up to nearly five shekels to the dollar, but for now seems to
have stabilized at about 4.95 shekels to one dollar. It is
said that Israeli economic leaders would prefer that the
shekel strengthen a bit, to around 4.8 shekels to the dollar.
The weakening of the shekel has inflationary effects, as many
of the imports -- including energy -- are priced in dollars.
Since the dollar has fallen in international markets in
recent months, the weakening against the dollar is magnified
in terms of euros and other currencies.
