A 2.7% increase in public expenditure – this is the main recommendation of IDI's 16th Caesarea Forum Macroeconomic research team headed by Prof. Nathan Sussman and representatives of The Bank of Israel, The Ministry of Finance, and the academic and business sectors. After analyzing three possible scenarios, most of the team recommended one that is consistent with goals that guarantee fiscal stability and support long-term growth, while still providing an effective solution to the negative effects of the economic slowdown, especially on the lowest quintile. For the first time in 16 years, the team's recommendations are not unanimous, and the Treasury's representative, Mr. Sharon Gambsho, deputy supervisor of budgets, presented a minority opinion: "Fiscal credibility is not trivial. Frequent changes in expenditure limits will be perceived as a severe blow to credibility by the American administration, the credit rating companies, and the Israeli market."
Two additional scenarios were analyzed: The first is a minimal scenario, without any anti-cyclic activity, in which the growth rate of public expenditure is 1.7%, as was decided by the government in 2006; the second is a maximal scenario, in which the growth rate of public expenditure is 4.1%, which is consistent with realizing all of the government's budgetary commitments for the coming years. The main differences between the scenarios are the rate of unemployment and the differential effects of government policy on maintaining the welfare of the lowest deciles.
The principal cost of implementing this policy is a delay of some five years in reaching the goal of a debt–production ratio of 60%, as suggested by the IMF: "Given that fiscal policy over the past few years has accumulated so much credibility, it seems we can cash some of the credit we have earned and act anti-cyclically. Considering the potential costs of the slowdown, this seems to be the best alternative." The Treasury's minority opinion was that "fiscal goals should be adhered to at all costs, in order to avoid damage to the credibility of Israel's fiscal policy, which has yet to be achieved."
The 2008 Caesarea Forum is marked by a shift from a period of quick growth to one of economic slowdown - a result of the financial crisis in the United States and its global ramifications. The team is of the opinion that many goals have been reached over the past five years: a decrease in unemployment, an increase in participation rates, a decrease in public debt, and a low and stable inflation rate. Even so, inequality in Israeli society is growing, and poverty has not been reduced. Moreover, Israel has been unable to close the gap with other developed economies, which also grew in the past five years. The ongoing crisis in higher education threatens to deteriorate even more. "Once most of the policy goals that are part of the policy package known as 'The Washington Consensus' have been achieved (low public debt, a decreasing debt–production ratio, and price stability)" states the policy paper, "it seems the government must face the challenges that are keeping Israeli economy from achieving higher standard of living and productivity."
“It is becoming clear that the short-term circumstances surrounding Israeli economy will not be as good as those that prevailed over the past five years, and policy-makers will have fewer degrees of freedom", states the report, and therefore "the desirable policy must balance the needs of fiscal stability, the treatment of possible blows to market activity, and long-term challenges".
The monetary policy of the Bank of Israel should not be altered; tighter supervision over financial bodies is needed.
Despite the rise in inflation and the revaluation of the Shekel, the research team does not recommend a change in The Bank of Israel's monetary policy. According to the report, the events of the past year show that despite increase and fluctuation in inflation rates, the public has not changed its fundamental expectations of inflation. The team explains this as a sign of the public's trust in The Bank of Israel's monetary policy. "Interest rate policy must maintain inflation goals, while paying some attention to anti-cyclical policy".
Except in cases of irregularities, most of the research team does not recommend intervening in the forex market in order to curb the strengthening of the Shekel.
As the international financial crisis may affect financial stability in Israel and the economy's macroeconomic performance, the team calls on the stock market regulatory authorities to prepare for the possibility of adverse circumstances in the financial sector, in order to minimize the effects of crises on the economy's real activity. Furthermore, they call for tighter supervision over the activity of financial firms and the use of new financial instruments.