In the interests of growth By Nehemia Strasler Friday, August 6, 1999 Finance Minister Avraham "Beiga" Shochat firmly holds the view that there is a direct connection between the fact that the economy is still in the doldrums and the fact that the Central Bank has kept interest rates at extremely high levels. Shochat is convinced that the brunt of these rates are not borne by the captains of finance and industry, but by households and small businesses. According to his calculations, the overdrafts amassed by domestic households come to approximately NIS 80 billion. Since the households are servicing this credit at interest rates of around 13 percent, it means that they are paying NIS 10 billion annually in interest. Large companies and the top percentiles of the population are putting their surplus cash in shekel deposits, on which they are earning high interest. As he sees it, the high interest rates have become a regressive form of taxation, a social obscenity that increases the gaps between society's haves and have-nots. If the price for changing this situation is a slightly increased inflation rate, so be it: Shochat does not think this would be a disaster. All his talk of curing social ills, however, cannot mask the fact that Beiga has his basic economic facts all wrong, and is trying to embark on a policy flawed by cardinal mistakes. The first one is the assumption that the recession is the result of the Central Bank's monetary policy. This does not hold water, and if Beiga wants to look at the face that launched the recession he would do well to look at the nearest mirror. It was the spendthrift wage agreements and widening deficits he sanctioned during his previous term at the Finance Ministry that toppled the economy into its current state. This view is held by many senior officials, including Beiga's hand-picked choice for the treasury's director-general, Avi Ben Basat. The second mistake is his assumption that the brunt of the interest burden is borne by the have-nots. A hefty portion of that NIS 10 billion annual debt service is paid by the self-employed, a group that includes retailers and wholesalers of any number of goods, importers, lawyers, accountants, dentists, optometrists and other individuals not known for their poverty-stricken circumstances. |
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