Jul.12, 2012 | 6:45 AM–There has been something eerily trivial about the debate raging over our fiscal policy. Should next year’s deficit be allowed to float upwards to 3% of gross domestic product, as the cabinet voted at Prime Minister Benjamin Netanyahu’s behest? Or should it be kept to no more than 2.5%, as the treasury mandarins and Bank of Israel governor Stanley Fischer were insisting?
In Europe – our role model, if a somewhat diminished one these days – most of the continent is expecting deficits in excess of anything Israel is contemplating, as Bibi has gleefully pointed out. France is expecting overspending to reach 4.6% of GDP this year, Britain 5.8% and Spain 5.7%. Okay, Italy plans just a 2.2% deficit, but it is swimming in debt. Germany is minding its books even more carefully, but then Germany is conventionally regarded as being fiscally strict to a fault, at the risk of economic growth.
In the global context it is hard to get exercised one way or the other over the 0.5 percentage point gap.
Yet, trivial it is not. Bibi signaled as much when he went around the backs of Fischer and the Finance Ministry and announced his 3% target without telling them in advance, much less consulting with them. Fischer fired back, once at the Caesarea economic conference in June, again at the July 1 cabinet meeting that approved the 3% deficit and a third time last week, when he warned that looser fiscal policy will spell tighter fiscal policy.
In other words, even as the economy slows and inflation is well within the official target, interest rates won’t continue falling.
The iceberg in the room
The debate isn’t trivial, but the terms in which it is being framed are akin to the crew of the Titanic debating how much of a delay the iceberg will cause in their arrival time to New York.
The iceberg for Bibi and Fischer is the world economy, whose situation is looking increasingly dire. The 1.5% deficit originally targeted has long been thrown into the dust heap of history, and the 2.5% and 3% ceilings are headed for the same fate. The only question is how much will taxes have to rise and how draconian the cuts will have to be to prevent it from ballooning to those European levels…Read More>>