First let me say that I am very happy to be here representing the IMF and participating in these discussions.
In my remarks, I want to draw out three things which I see in the paper that have been presented and highlight them. The three things are: debt; consensus; and the future.
These three things are closely interconnected.
I want to start with debt because we are not so sure that there is consensus yet in Israel about the priority of reducing public debt.
I sometimes wonder how long it is going to take for humanity to understand the dangers of debt, despite the multiple warnings that we have on the subject.
- All of our major holy books, including yours, warn about it.
- Shakespeare said “neither a borrower nor a lender be”.
- I have always been impressed by the reflections on this subject by Senator Bob Dole, the former US presidential candidate. He talks about his experience as a boy growing up in Kansas in the 1930s during the great depression, where he saw a number of his neighbors, many of whom were farmers, taking their own lives under the burden of debt. As he puts it, from that experience he learned at a tender age that “debt can kill”.
- More recently, we have the third world debt crisis in the 1980s, we have the disaster of structured products in the global economy in the first decade of this century which blew up in 2008 and 2009, and now we have the sovereign debt crisis.
And yet still the message of the dangers of debt is resisted.
I have to say that the academic economic literature on this subject does not really help. In fact, I think it largely misses the point. What it does is to ask if countries with high public debt grow more slowly in the long run. Some researchers find that they do and some do not--overall the answer is ambivalent.
But if you want a way to assess the import of that academic conclusion, just think of going now to a number of countries and informing them of it. Think of the reaction you would get in Greece or Portugal or Ireland, amongst others.
As a result of what we saw as the weakness of the academic literature, when we came to Israel in December last year, we decided to take a fresh look at the question of what happens to countries which are highly indebted. In particular, we asked “what happens to countries’ access to financial markets when they are highly indebted, when global financial markets are under stress?”
When you ask that question, it is absolutely clear that the more highly indebted you are, the greater the loss of access to financing you have, when financial markets are under stress.
We also asked “at what level of debt does this effect start to kick in? And we concluded-- there are of course different ways of measuring where the threshold is—that Israel exceeds them, sometimes with quite wide margins depending of the particular estimates of the thresholds that are used.
In our view therefore, the level of public debt is a serious issue for Israel.
When I make these points in Israel, I get a range of responses. I have to respond both to what people say, and to what people think but don’t say, at least what they don’t say to me. I want to go through some of those counter-arguments with you now.
One of the points that is sometimes made—and perhaps more often thought—is “ok, Israel has public debt which is a little below 80% of GDP and it has some strategic challenges. But, at the same time, Israel has a floating exchange rate which is supported by very effective and credible central bank. Therefore, we have the buffers that we need to deal with this issue.”
If that is what you think, then reflect on the following. There is another place in the world which also has public debt a little bit below 80 percent of GDP, which also has strategic challenges, which also has a floating exchange rate which is also supported by strong and credible central bank. That place is the Euro Area.
When I point that out, you may say to me “that’s all very well Mr. Doyle, but we do not have in Israel the geographic concentration of fiscal stress that you see in the Euro Area.” And I will agree with you on that. But you have fiscal stresses all of your own. Some of those we discussed in the sessions yesterday relating to the issues in the labor market. You also have a uniquely heavy burden of security related expenditure. Plus of course, you have the difficulties of managing the budget in the context of coalition politics. Thus, you have fiscal stresses very much of your own.
You may then say to me “But Mr. Doyle, we also have the guaranties provided to us by the diaspora, and by the United State government”. And if that is what you think, I would ask you to reflect again on the Euro Area, where countries also thought that they were covered by implicit guaranties. You can see the great harm that came to them when those implicit guaranties came to be called into question.
And the last point I infer that people think is “well, but in Israel, we have lived with high public debt for quite a while”. And to that, I would say, that is exactly what was said in the Euro Area, just as we heard last night in the presentation from Jeffrey Frankel.
In our view, putting it very simply, public debt in Israel is too high. It needs to come down and that should become a national strategic priority.
That is what we think about debt.
Now I want to highlight a second theme in the paper, which is about consensus.
When the government of Israel announced that it was going to commit itself to a new fiscal rule--which ties the growth of expenditure to public debt—we in the IMF strongly supported that commitment. I want to reiterate our support for that commitment today. The reason why we support it is because it reflects very concretely the priority that the government attaches to reducing public debt, and I just outlined the premium that we think is appropriate to attach to that goal.
But while, in our view, it is a necessary condition for stability in Israel that public debt comes down, that is not sufficient. A key additional element that is required for stability is to achieve national consensus on that objective.
To ensure that this is not just the view of the government and of the government parties, but of all major parties and across the general public, I would strongly urge the government of Israel to devote considerable effort to securing that consensus for its public debt policies, not just pushing them through unilaterally. The basic reason is very obvious. It is that the credibility of the rule will be much stronger if it is shared by parties outside the government because that means that the commitment to it will survive even if there were to be changes in the government. That makes the whole arrangement much more firm.
To achieve that, there is need to achieve consensus on some other issues too. In particular, there has been a debate—and indeed, we have had some of it in this session—as to whether debt reduction should be achieved with big government or with small government. Our concern is not that there is a “right answer” to that debate, but rather that while that debate is unresolved in Israel, disputes over it may jeopardize delivery of debt reduction. So we also strongly urge that efforts focus on achieving an adequate degree of consensus on the “big versus small government” question, in order to secure the public debt reduction goal.
Various things will help achieve that consensus, one of which is efforts to promote growth: if you have higher growth then it is a win-win for everybody; you get lower taxation, higher public spending, and lower public debt, all simultaneously.
For that reason, I was listening carefully to the discussion yesterday about the labor market challenges and about their role in the long-term productive capacity in Israel. Having heard you discuss that, my instinct is that the successful resolution of those structural labor market issues is probably more important to Israel’s prospects than is getting the right answer on the “big versus small government question”. That is how important these labor markets questions are—because they are key to securing growth.
But even if you have got agreement on actions necessary to support growth, you still need agreement on the medium-term expenditure of the Government. For that reason, we have called over and over for strengthened medium-term budget expenditure planning mechanisms.
Whenever, I recommend that, it always sounds in my ear that I am talking about something very technical, about budgeting arrangements. I am not. I am talking about something which is necessary to establish consensus. Why? Because while you are arguing about “big versus small government”, I have the distinct impression, as an outsider, that neither side of this debate has a really clear idea about what exactly is at stake. Instead, you roughly know what is at stake; on one path for taxation, you roughly know the implications for the growth of pensions and welfare benefits and defense expenditures, and on a higher path for taxation, you roughly know that spending can be a little higher alongside. But the lack of concrete, clear estimates of these things is, I think, impeding progress to the successful consensual resolution of the “big versus small government debate”.
So I call again for effort to be placed on strengthening the medium-term budget and processes in Israel.
That is also the context in which we support the two-year budget arrangement. The simple reason why we support the two-year budget is the basic intuition: the less time you spend arguing over budgets, the more time you spend actually implementing them, the more effective they will be and the more consensual budgeting will actually be. It is as simple as that.
I recognize that the team has some concerns about the practicalities of the two-year budgeting arrangement. Key amongst those is concern that there may need to be mid-course corrections. But, in my view, that observation is not an argument against a two-year budget. It is in fact another argument pointing out the dangers of high public debt, because you are much more likely to have to make mid-course corrections to budgeting if you have high public debt. Those concerns in the paper should therefore be refocused on emphasizing the case against high debt, rather than being presented as an argument against the two-year budget.
I want to close by making an observation about the third theme in the paper—the future.
As an outsider coming to Israel, I am struck by the following simple observation, which is that Israelis, who have a phenomenal focus and interest in their past going back many thousands of years, have a remarkably short planning horizon. I understand the reasons why, namely that there are many exigencies in the short term with which you have to deal. But if you look back at the Fund advice to Israel over the past 10 years or more, you will see there is a theme running through it all which, simply, is “look further ahead”. That is fundamentally what the Fund has been saying to Israel for the past ten years.
And I want to say it again now.
In recent times, the government of Israel has taken action which shows that this is happening:
- You have joined the OECD
- You have passed a very good Bank of Israel law
- You have adopted a new fiscal rule
- And a new group has been established to look at business conditions in Israel.
These are things which show that the horizon over which you are planning is lengthening, as it should.
In my view, the basic argument for doing that is simple: notwithstanding how complicated the short-term exigencies are, you will always find them easier to deal with if the fundamental trajectory on which you are set is stable. There is no choice to be made between looking at the long and short-term.
So what is my summary recommendation for Israel?
“Look further ahead together.”
Thank you.