[Israel] Fischer: Decade of 5% growth needed to cut poverty

from The Jerusalem Post

Economic growth must keep a pace of least five percent per year for 10 years for Israel to reduce poverty significantly in the long- term, Bank of Israel Governor Stanley Fischer told the Finance Committee Tuesday.

"While it is certainly important to reduce poverty in the short-term [as well], if we do not maintain the desired growth rate, [Israel's] security and social condition will be weakened," he said.

"If we don't succeed in growing, we will pay a very high price, so there is a need to balance defense needs and security needs, and we still have not arrived at the perfect balance."

Fischer also advocated instating an absolute poverty threshold - bringing Israel in line with the US method of presenting poverty and canceling the current relative calculation - and setting a target towards which the government would work to pull a certain number of people out of poverty each year.

Among other tools to reduce poverty long-term, Fischer reiterated the central bank's support for a negative income tax (NIT) system to assist workers whose incomes are too low to bring them and their families out of poverty, which he said he hoped the government would adopt.

Fischer also repeated his call to bring the value-added tax (VAT) level back up to its pre-June level of 16.5% to head off effects of expected uncertainty regarding 2007 defense spending and possible lower-than-expected economic growth in the US, which could lead to greater uncertainty in world markets.

He stressed that if the government delays raising the VAT for now to help cut the deficit and debt but is forced to do so in 2007, the Israeli economy's image of reliability would suffer among international markets. Once the VAT is raised, it can be brought back down if conditions permit, Fischer noted.

Nonetheless, the governor opposed recognizing mortgage payments for taxation purposes, which he said would hurt government revenues and was shown in the US to benefit primarily the middle class, not the poor. He also discouraged the implementation of a progressive interest rate system that would discount interest for social aims and charge the business sector a higher interest rate, saying that such systems had not proven themselves and that to help the poor it would be better to directly subsidize their needs rather than seeking solutions within the financial system.

Fischer also praised the behavior of Israeli citizens during the war in the North, who "against expectations … brought their money into the country, as opposed to in the past, when they rushed their money abroad. This proves that they had faith in the economy, and that is a good sign," he told the committee.

Updating earlier forecasts, Fischer said the economy will have grown 4.6% by the end of 2006, down from his pre-war forecast of 5.3%, and that it would grow 4% in 2007, down from a prediction of 5.1% growth made before the war.

The conflict cost the economy about 8% of GDP, Fischer estimated, reiterating his assessment made during the fighting that it would cost between 7% and 9% of GDP, or up to NIS 5 billion.