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The Bank of Israels Recommendations regarding Policies for Dealing with the Crisis Research Department Bank of Israel March 2009.

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Presentation on theme: "The Bank of Israels Recommendations regarding Policies for Dealing with the Crisis Research Department Bank of Israel March 2009."— Presentation transcript:

1 The Bank of Israels Recommendations regarding Policies for Dealing with the Crisis Research Department Bank of Israel March 2009

2 Background and Goals The Israeli economy is facing a recession as a result of the global financial crisis. The sectors of the economy expected to be hit the worst are exports, the financial sector and those industries which rely heavily on credit. The objectives of the plan are to reduce the negative impact on growth, employment and welfare, while minimizing the long-term effects on the economy. The policy measures to minimize the damage from the crisis need to increase aggregate demand, reduce the effect on employment and welfare and ease the credit shortage.

3 GDP Growth Rates (seasonally adjusted, quarterly rates of change, annualized) Source: OECD database and Bank of Israel calculations.

4 Principles of the Proposed Policies The policy measures need to be: of significant scope varied available (applicable within a short period of time) and simple to execute focused on the low income population (those with high marginal propensity to consume) and local activity labor intensive temporary those which reduce the long-term damage to the economy

5 Finance Ministrys Proposals As Part of the Stimulus Plan Accelerated implementation of multi-year infrastructure investment projects Professional training (NIS 200 million) Increase in the budget of the Chief Scientist (NIS 350 million); establishment of funds for bio-technology and R&D in peripheral areas of the country Making the eligibility period for unemployment benefits more flexible Providing incentives to integrate Israelis into the care-giving industry, replacing foreign workers, and a pilot program in agriculture; strengthening enforcement to reduce the number of foreign workers Government guaranteed credit for building new non-luxury homes Some of the measures have already been accepted and the challenge remaining is implementation; The scope of the plans are thus far limited, amongst other reasons, as a result of the absence of an approved budget for 2009

6 Suggested Policies for Dealing with the Crisis Labor Market Application of the earned income tax credit plan on a national level in 2009. Extension of the Lights To Employment program to a national level. Extending the eligibility to receive unemployment payments and immediately making the requirements of the qualifying period more flexible. To activate on a case-by-case basis a vacation-without- pay plan, financed by the state, for factories in the periphery, experiencing a temporary decline by demand. (This proposal is currently under discussion in the Finance Ministry, the National Insurance Institute, employers unions and the Histadrut.

7 Suggested Policies for Dealing with the Crisis – specific measures Real Sector To expedite preparations for other infrastructure initiatives, specifically in public transportation. Initiation of public projects. For example: rehabilitation of city centers and neglected tourist attractions by means of tenders and acceleration of the relocation of IDF bases to the South. The early application of multi-year programs in the education system, such as New Horizon and/or the initiation of one-time projects of government ministries via tenders. Additional expansion to the budget of the Chief Scientist Expansion of the government guarantees via the Israeli Foreign Trade Risk Insurance Company.

8 Education and/or other government ministry projects City-center rehabilitation Additional measures Increase R&D budget Reduction in number of foreign workers Earned income tax credits Unemployment Benefits Lights To Employment Government Sponsored Unpaid Vacations Promotion of infrastructure initiatives Cost of Proposed Measures (beyond those already budgeted for) Labor Market Total – NIS 1,790 million Industry and Exports Total – NIS 1,150 million Projects Total – NIS 1,500 million NIS million Total – NIS 4,440 million

9 Budgetary Policy Enabling the automatic stabilizers to operate. Implementation of this plan, costing NIS 4.4 billion, without other budget cuts, will increase the budget deficit to about 5.8% of GDP compared to the expected deficit of 5.2% if expenditures increase in accordance with the current law. It is recommended that the plan be implemented together with a review of the governments budgetary priorities. Within this framework an attempt should be made to reach an agreement about a postponement of public sector wage increases. Some cuts in expenditure not focused on domestic activity would help demonstrate the governments commitment to reducing debt in the medium term which itself would help reduce financing costs.

10 Budgetary Policy (cont.) Currently the ratio of public debt to GDP is relatively high, any increase in expenditure, which means an increase in the deficit, should be kept moderate, to minimize the resulting rise in interests rates on the debt. In case the deficit rises to unexpected levels and yields go up, other measures can be adopted to curb the deficit rise, for example: postponement of tax cuts planned for 2010, cancellation of tax exemptions and the deferment of some proposed plans. In order to minimize the rise in interest rates the stimulus plan should be accompanied by a policy that ensures a significant reduction in the debt-to-GDP ratio in the medium term.

11 Fiscal Stimulus Plans and Debt-to-GDP Ratios Fiscal stimulus packages as publicized in the 20-G countries in the middle of January, excluding the U.S., for which the data include the plan publicized in February. The plans refer to their scope in 2009. Source: CIA World Factbook, IMF, Cottarelli (2009)

12 Suggested Policies – Financial Aspects In order to deal with the financial aspects of the crisis, the major measures formulated by the Finance Ministry in cooperation with the Bank of Israel and the Securities Authority for those projects underway are: –Establishing a process of rescheduling debt in the corporate sector (credit officers). –Establishment of investment funds in cooperation with the private sector (leverage funds). –Giving guarantees to banks for the purpose of raising capital and increasing credit sources. –Establishment of a credit fund for medium-sized businesses with government guarantees, extending sources for a credit fund for small businesses and the easing of criteria in the fund for lone exporters. The Bank of Israel, along with the Finance Ministry and the Securities Authority, is evaluating other policy measures for dealing with the credit shortage as necessary.

13 The Macroeconomic Picture Under the Different Fiscal Policies:

14 The Results of the Stimulus Plan A reduction of the impact of the crisis on growth by half a percentage point, and a decrease in the rise of unemployment by half a percentage point (a decrease of about 15,000 unemployed). The impact on the income of the lower income population will be moderated as a result of the increase in welfare payments. Furthermore the poverty rate will decrease by one percentage point (about 4000 families). The estimates of the real macroeconomic effect may be higher than presented here because they do not fully take in to account changed composition of public spending.

15 Summary A vigorous and determined execution of the recommendations that were presented in the economic stimulus plan adopted by the government and other recommendations in the area of research and the construction industry, implemented alongside the recommendations suggested above, will help boost aggregate demand, relieve the credit shortage in the business sector, reinforce public confidence in the financial system, mitigate the effects of the recession to some extent, slow the rise in unemployment, and provide relief to the weaker sectors of population. The recommendations focus on a policy that will minimize long-term damage that would adversely affect future economic development.

16 Thank you

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