News Column

BoI Governor: Gaza operation could shave 0.5% off GDP

August 10, 2014

Globes, Tel Aviv, Israel

Aug. 10--Governor of the Bank of Israel Karnit Flug told Channel 10 that the damage resulting from Operation Protective Edge would be up to NIS 5 billion, 0.5% of GDP.

"Experience shows that the economy is immune at the macro level, and recovers fairly quickly, although it is clear that people have been hurt, especially residents of the south, small businesses, and people issued emergency call-up orders," she said.

Senior Ministry of Finance sources told "Globes" that the Ministry of Defense was demanding NIS 6-8 million in compensation for Operation Protective Edge. At a press conference today, Minister of Finance Yair Lapid said, "We won't raise taxes. The economy needs growth engines right now, not handicap weights. There's no reason to raise taxes at this time.

Asked whether the cost could be contained within the 2014 budget, Flug answered, "There is still no estimate for this." In response to a question about raising taxes, she stated, "It will be necessary to decide next year about taxes. The defense requirements resulting from this operation are liable to grow, among other things, and the government will have to decide whether to raise taxes or cut civilian spending." Flug refused to directly express an opinion about raising taxes, noting that this was the government's job.

In the Bank of Israel's monetary report published this week, the bank's Research Department economists stated that despite Lapid's declarations that taxes would not be raised, the government would not be able to meet the deficit target (2.5% of GDP) without a tax hike and budget cuts or postponements in spending programs.

Commenting on the elimination of VAT on a first apartment, Flug said, "This isn't really related to the fighting that took place. The VAT exemption is ineffective as a solution to the problem of housing prices. The solution has to be a massive increase in supply. Prolonged uncertainty is liable to affect the supply that is the solution."

Addressing the possibility that a peace agreement with the Palestinians could help the economy, Flug said, "The potential of a diplomatic settlement for helping growth is clear, and it's also clear that a settlement could have helped. I don't make recommendations in this matter to the prime minister, but it's obvious that there is potential for a substantial contribution to growth."


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Source: Globes (Tel Aviv)

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