Wednesday, March 11, 2009

Fischer’s ‘Modest’ Rescue Plan

Tzvi Ben Gedalyahu Fischer’s ‘Modest’ Rescue Plan

Bank of Israel Governor Prof. Stanley Fischer presented a “modest” 4.4 billion shekel-$1.1 billion economic rescue plan on Tuesday for more government spending and a higher deficit, but he has no magic wand to stop the recession.

His program calls for increased aid for lower-income families, including a negative income tax, incentives for increased exports and industry and stimulus outlays for the labor marker.Labor union and businessmen praised Fischer’s proposal despite his own admission that it will give limited help to the ailing economy, which by all accounts is in a recession.

Fischer explained that the suggested government outlays are a lot less than those proposed by other countries but that “we do not have a lot of leeway in government spending” because of the high personal and government debt.

He suggested increasing the government deficit to 5.8 percent of the gross domestic product (GDP), 10 percent higher than the current deficit and far higher than the previous maximum target of three percent.

Higher oil prices and the higher exchange rate also may spark a reversal in falling energy prices and cause higher inflation. The worse scenario for the economy may be “stagflation,” whereby the economy sags while inflation rises.

The Bank cannot stimulate the economy by lowering interest rates much more because they already are near zero, one of the reasons that the shekel-dollar rate has soared from 3.30 to 4.25 in the past year. The higher rate encourages exports but also may cause higher inflation, primarily in real estate deals that are quoted in dollars.

The stimulus program will save 15,000 families from unemployment, according to Fischer, whose term of office ends in May. He recently stated his conditions for accepting another three-year term, and the Finance Ministry will likely approve despite its being upset with his demands for less ministry authority in overseeing the capital markets.

No comments: