| The Governor of the Bank of Israel held a press conference today at the Bank of Israel in Jerusalem. He briefly reviewed global economic developments and their possible implications for the Israeli economy. Following is a summary of the speech: |
| This evening agreements were signed in the US to raise the debt ceiling and thus prevent the occurrence of an event that we had not thought possible in that country. Whatever the case, it is good that this event has been averted, at least until the elections in 2012. However, there are other developments in the US economy that are also not very positive. The latest growth figures show a drop in the rate of growth in the first quarter relative to the figures that were previously released and the rate of growth is not particularly high in the second quarter either. This indicates that the American economy is very close to a slowdown in growth and perhaps something even worse, in view of the fiscal restraint that is expected and the lack of possibilities for an expansionary monetary policy. Therefore, there are no measures, at least not conventional ones, available to deal with the low rate of growth in the US. |
| The peripheral countries in Europe are still in the midst of a government debt crisis. In the second agreement with Greece, the European authorities have arrived at an important stage in resolving the debt crisis. Thus, they have reduced the debt and come to an agreement with the banks to reduce the quantity of Greece’s debt on their balance sheets. Greece’s debt is very large, which is making it difficult for the country to return to a growth trajectory. Thus, the change in the approach of the European authorities is very important. On the other hand, the spread of the crisis to Italy is much more dangerous since dealing with a crisis there and in other large economies will be much more difficult. We are beginning to see the downward revision of growth forecasts in Europe. In China, forecasts of a slowdown are heard every month, though in the end they are proven wrong; however, if a slowdown does occur in China there will be widespread implications for the global economy. What this means is that the global environment in which the Israeli economy operates is becoming more problematic and this is already having an effect on exports. |
| Another important point is the lack of progress in the peace process between us and our neighbors, which represents a constraint on economic growth, particularly in the long-term. |
| Recently, we have been witness to a wave of protests in Israel, particularly among members of the middle class. This is in spite of the positive economic situation and the fact that the unemployment rate is at its lowest level in twenty years. With that said, one can only be impressed by the fact that 150,000 people attended the protests on Saturday night and by the tent cities all over the country. |
| In order to understand the demands of the protesters, we must first have an in-depth understanding of the situation—and not just the economic situation—from which this protest has emerged. I will discuss four main issues, all of which are complex and require in-depth study and discussion, the preparation of operational plans and, no less important, execution of those plans, which we are not always good at. Dealing with these four issues requires the creation of four professional workgroups, which will analyze the source of the problems and suggest solutions. As was done in Israel during the 1985 Stabilization Program, there is also a need for monitoring teams for each of the programs, which will monitor progress on a daily basis and if difficulties are encountered will immediately bring them to the attention of the relevant ministers. Programs don’t implement themselves; someone needs to implement them. |
| The first issue is the housing situation. The price of housing in real terms has risen by 1.7 percent annually since 1973. In 2008, prices began to rise rapidly and during the last three years have risen by about 50 percent in nominal terms. Prior to the large wave of immigration, the pace of construction had been stable and was consistent with the increase in the number of households; it then accelerated considerably in response to the arrival of a large number of immigrants in the 1990s. However, during the first half of the 2000s, the number of households grew more rapidly than the stock of housing, without any increase in prices. This meant that during most of the previous decade, there was excess supply in the housing market. This surplus had disappeared by 2008 and since then prices have risen, primarily for this reason. The last Bank of Israel Annual Report presented an analysis which showed that the building process, which proceeds from the sale of land, to obtaining Israel Land Administration approvals and then building permits and finally to construction, takes about five years. The process is undoubtedly too long and should be shortened. But the figures show that things are starting to happen: since the beginning of the rise in housing prices, there has been an increase in construction. Construction takes about two years and therefore the increase in construction did not have an immediate effect on prices, which began to rise anyways. Nonetheless, supply is reacting and that is important. |
| The Bank of Israel has taken a number of steps to deal with the risks that have appeared in the mortgage market. The Government announced the creation of national housing committees in March and that it will institute a reform of the Israel Land Administration. However, the relevant legislative processes have not yet been completed. I hope that this will happen soon and that we will see an increase in housing construction but it should be understood that there are no magic solutions that will bring down housing prices. The time it takes to build can and should be shortened but in any case it will take time until the supply of housing increases. |
| Claims have been made that the Bank of Israel is responsible for the increase in housing prices due to the low interest policy it adopted during the crisis. There is no doubt that if the Bank of Israel had not lowered the interest rate there would not have been any housing crisis since in that case we would have been dealing with a high rate of unemployment, like those in Europe and the US, and in any case the unemployed would not have contributed to the demand for housing. Similarly, construction would not have started to accelerate if prices had not gone up. Analyses published by the Bank of Israel show that the interest rate is responsible for half the increase in housing prices. But this is only correct for a particular period (i.e. the years 2009-10) but if we look at the whole episode, i.e. from the beginning of 2008 until now, during which housing prices increased by about 50 percent, then the interest rate is responsible for about 20 percent of the increase (i.e. 10 percentage points). Furthermore, the current level of the interest rate is, according to our estimates, already contributing to the drop in prices. The main source of the problem in the area of housing is the supply side. The pace of construction needs to be increased, with the hope that there will not be any overshooting that will lead again to an excessive drop in prices. In any case, the housing problem is on its way to a solution. |
| Another issue currently on the agenda is the cost of living in Israel. In this context we need to understand why in some sectors imports are not bringing down the level of prices to those prevailing abroad. In my estimation, this is a result of the marketing mechanisms. Increasing the efficiency of the marketing mechanisms is essential in order to raise the standard of living in Israel. In addition, some prices are a result of government policy, such as the taxation of automobiles which is meant to achieve environmental goals. |
| A third issue involves the structure of the tax system. The Prime Minister intends to announce the creation of a committee that will examine the tax system in Israel. This is in my opinion a very important decision. The starting point of the discussions in this committee should, in my opinion, be the fact that the statutory rate of indirect tax has fallen during the last decade by about 5 percent while the statutory rate of direct tax has fallen by about 25 percent. This has had a major effect on inequality since indirect taxation is regressive and direct taxation, which has been reduced, is progressive. |
| The fourth issue involves the ability of the General Government to provide the services demanded by the public in an efficient manner which is consistent with the constantly changing reality in Israel and with budget discipline. Part of the problem with the public sector is the bureaucracy. We have been warning the Government for a long time of the need to improve the efficiency of the public sector, which is confirmed by, for example, the Doing Business reports published by the World Bank. In addition, there is apparently a feeling among the middle class that the Government is not looking out for its interests. Each of the government services needs to be examined in order to determine whether changes need to be made and if so to characterize them. We also need to remember that in many ways we have an excellent government. I can state from personal experience that the health system, for example, is superior to those in many other countries and certainly for the average citizen. |
| One of the Ministry of Finance’s roles is to maintain budget discipline. The Minister of Finance and his staff are doing an excellent job in this area. Without the budget discipline that they advocate we would not have weathered the global crisis so successfully. It is important that we praise those who are doing a good job. We must also recognize the fact that despite the pressures it faces, the Government has been performing well since its formation and it is implementing a very responsible economic policy. |
| I began by mentioning the global economy. Global economic developments, apart from during the year of the crisis, have been positive for the Israeli economy which was able to exploit them in order to increase growth. However, it is certainly possible that we are entering a difficult period from the perspective of the global economy. We must not become complacent. The Israeli economy and the government budget are in good shape but we can easily make wrong decisions that will harm the situation. Consider Ireland which until three years ago was an example to other countries with respect to good economic policy – it is now in a very difficult situation. It is possible that we need to make changes but there are no magic solutions. Every solution needs careful thought and hard work. |
| I would like to finish by mentioning the protesters. As in every other country, the middle class in Israel forms the backbone of Israeli society. They contribute the most to the State in general and to the economy in particular. We must examine the demands they are making and estimate how much it will cost to meet them and then make a considered and responsible decision. It is hoped that the protestors will also behave responsibly with regard to their demands. I won’t get into their political demands. The protesters certainly are contributing to the quality of politics in Israel. However, someone who really wants to have an influence should go into politics. Political endeavor is difficult work but very important. If none of the protesters, who fervently believe in the future of the State, go into politics, this will be a loss – both for them and for the country. |
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