Fiscal discipline will be an integral part of any country’s efforts to resolve debt problems, irrespective of the size of the nation’s economy, a senior banker from Israel said at a recent symposium in Tokyo.
Joseph Bachar, chairman of Israel Discount Bank group, said Israel’s lessons learned from its experience in dealing with its crisis in the early 2000s will be relevant for the current debt woes in the much bigger economies of Europe or the United States.
Bachar, formerly director general of Israel’s Finance Ministry, was speaking at a symposium organized by the Keizai Koho Center on Oct. 15 to discuss the global economy and Mideast issues.
“We are a very small country” whose economy is equivalent to 5 percent of Japan in terms of gross domestic product, but its macroeconomic principles are not much different from those required in running a major economy, he said.
Bachar said that Israel survived the global financial crisis “almost unhurt” after its economy went through a set of macroeconomic reforms earlier in the decade.
The heavily export-dependent Israeli economy ran into a deep recession in 2001 and 2002 after the dot-com bubble burst in the previous year, he said.
With support from the U.S., Israel adopted a macroeconomic policy “that is very similar to what you hear today about what is required from the European countries, from the U.K. and from the U.S.,” he said. “We were in a position in which we could not borrow in the international market to finance our deficits” that had gone out of control to reach 9 percent of GDP, and interest rates for government securities were close to 9-10 percent, he noted.
The basic principle of the reform plan was simple — that the government cannot spend much more than its income, and that it has to control its expenditure as well as its deficit, Bachar said.
Based on budget discipline, Israel managed to bring down government spending from 50 percent of its GDP to 42 percent in eight years “by putting a ceiling on the expenditure” that the state cannot increase its spending “no matter what happens to its income” by more than 1 percent (later revised to 1.7 percent) a year, he said.
The budget deficit was reduced from 5.8 percent of GDP to zero in 2007, and even though it rose to 5 percent in 2009 following the collapse of Lehman Brothers in 2008, it has since been brought back to the 3-4 percent range, he said.
“This is a very important point — we were able to require the government not to increase its deficit even if there was a big pressure … because it has been a norm in Israel that you cannot have a budget deficit higher than 3 or 4 percent no matter who is in power in the government,” he said.
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