A financial plan proposed by Israeli Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz aiming to increase Israel's 2009 budget deficit to 6 percent of gross domestic product (GDP) may be too meek to effectively address the negative impact of the financial crisis, analysts said.

"It takes time for the government and people to recognize how serious the crisis is. They have to try to react more aggressively than they imagined before," Doron Weissbrod, economist at Bank Hapoalim, told Xinhua, noting that the government had to take drastic steps in order to overcome the problem posed by the crisis in the short run.

"As Paul Krugman said in a recent article in the New York Times when asked how fast or strong to react to the crisis: if x billion is enough, first of all double the x," Weissbrod added.

The financial plan launched by Netanyahu and Steinitz aims to support the Israeli economy and provide a solution to the credit crunch, both inside and outside the banking sector.

Though the Israeli economy has withstood the crisis better than most industrial countries to date, Netanyahu said that growing unemployment required the implementation of a financial plan to soften the impact of the global credit crunch on Israel.

The plan consists of five distinct steps. The first two steps are "curbing" actions and aim to improve credit, encourage exports, prevent layoffs and promote employment, while the final three are aimed at returning the economy to a path of growth, including structural reforms, new tax policies and changes to human resources and physical infrastructure.

Steinitz has made it his first priority to stabilize the business community, which he said is imperative to protecting export levels, curbing market shrinkage, and staving off mass layoffs, which could prove to be both financially disastrous and carry a devastating social toll.

Towards this aim, Steinitz has also suggested allotting 25 billion shekels, or nearly 6 billion U.S. dollars, to be used as a state guarantee for business credit lines.(1 U.S. dollar=3.866 shekels)

Weissbrod, however, said the suggested budget and 6 percent deficit fall short of what is needed.

He noted that, in the entire world, the crisis had led to an increase in the deficit due to the rise in unemployment and the decline in tax revenue. As a result, the deficit had grown versus the GDP. For example, the deficit in the United States is expected to be about 12 percent of GDP this year.

Though the Israeli economy entered the crisis under more favorable conditions than the other countries including the U.S., the fact that Israel is looking to limit its expansionary fiscal policy to a budget deficit of 6 percent while also suggesting a parallel cut of 14 billion shekels is problematic, Weissbrod noted.

"The right thing to do in Israel is not to adopt a proposal of cutting the budget by 14 billion shekels, which is about 2 percent of GDP," Weissbrod said.

"If they leave the deficit to grow without cutting the 14 billion shekels, the total deficit is expected to be around 8 percent, which is still not high relative to the standard that prevails now," he said.

Bank of Israel Governor Stanley Fischer also said the government should compensate for a higher deficit in 2009, but adding that it should lower the planned deficit for 2010.

Fischer supports a deficit of 6.5 percent of GDP in 2009 and 5 percent in 2010 with a gradual decline thereafter as opposed to the 6 percent deficit in 2009 and 5.5 percent in 2010 the current budget projects.

He said the government should offset higher spending levels by raising taxes so that the deficits do not increase, noting that most of the financing could come from delaying the income tax cuts planned for 2010.

Israel's central bank has addressed the financial crisis by pursuing an expansionary monetary policy, buying U.S. dollars in an attempt to stabilize the ever-fluctuating currency and to increase its foreign currency balance.

Fischer said he intends to continue to buy dollars as long as inflation remains within an annual target of 1 to 3 percent, in order to prevent dollar rates from slipping further. An appreciation in the shekel relative to the dollar would prove harmful to Israeli export industries.

According to the Israel Export & International Cooperation Institute, Israel's exports are expected to fall in 2009 by about 17 percent in dollar terms for the first time since the Jewish state's independence in 1948. Exports of goods and services are expected to total 67 billion dollars in 2009 compared with 80.4 billion dollars last year.

The estimate is based on the influence of the global economic crisis on international trade and a drop in demand in the 20 main export destinations for Israeli goods and services. The exports had doubled from 39.5 billion dollars in 2002 to 80.4 billion dollars in 2008.

Still, Israeli exports continue to be one of the main factors warding off much of the negative influence by the global financial crisis.

While global trade was slashed by 40 percent between August 2008 and February 2009, Israeli exports fell by only 30 percent. ABank of Israel study attributed Israel's buoyancy to its emphasis on high-tech exports. Israel's high-tech exports account for about40 percent of its total exports, nearly double the global average of 25 percent.

"Though Israel is a very small country it is a very open one and export makes up a very big part of the GDP, about 40 percent," said Weissbrod.

"When countries are afflicted by a financial crisis of global scope, their natural reaction is to reduce imports and to try and increase exports in order to overcome the crisis," Weissbrod said.

"Consequently, the impact on the Israeli economy due to the reduction in exports of Israeli products to our trading partners around the globe is very negative for our economy," he added.

He noted that Israel's saving grace lay in the fact that a big part of the country's exports are very sophisticated high-tech products, which is a niche market and enjoyed a more stable demand.

"This means that it might provide some relieve from the negative impact on our total exports. Demand of high-tech products will be affected less than a regular commodity," Weissbrod said.

He noted, however, that the government still needed to deal with all the other industries which did not enjoy such a status of exclusivity and required financial support.

In a recent report by the Organization of Economic Cooperation and Development (OECD), the organization emphasized that Israel must be adamant on cutting the deficit as fiscal discipline was less assured in the medium term.

The OECD, which forecasts Israel's economy to have negative 2 percent growth in 2009 and a meager 0.2 percent in 2010, noted that the ability of Netanyahu's plan to lower the income tax burden at the beginning of 2010 in order to save the economy from the recession will be limited.

"The plan will make it harder for the government to cut the budget deficit to 3 percent of GDP in 2011, compared with 6 percent this year and 5.5 percent in 2010," the organization said.

Source: Xinhua