the beginning of the last decade significantly increased the deficit, and the government was forced to ask for help from the us government through guarantees for raising debt. when we looked at the government ’ s commitments for 2013, we found that commitments are expected to lead to a real increase of 10 percent in government expenditure over 2012. this is a very large increase, particularly for an economy that is growing at a rate of three percent. a few years ago, the government made decisions limiting the rate of year - over - year growth in expenditure, and the limitation for 2013 according to this law is growth of about 5 percent in expenditure. it will therefore be necessary to reduce planned expenses by 5 percent. we must remember that even if the government does this, there will still be a significant increase in government expenditure for 2013. in addition, in order to meet the deficit target, we believe that it will be necessary to increase receipts by about nis 6 billion, or about 0. 6 percent of gdp. those who will need to decide where to cut will need to make tough decisions, but in the final analysis, after all of the cuts, this will be an expansionary budget, and i feel sufficiently at ease with such a budget. the bank of israel ’ s monetary policy is successfully keeping inflation within the target range most of the time. currently, both inflation and inflation expectations are within an easy environment, but we must not become complacent about inflation. a central bank governor who acts that way will find himself forced to deal with inflationary developments later on. we are constantly watching, with a magnifying glass, for any appearance of inflationary signs. we do not see any right now, but we must keep our finger on the pulse. public discourse constantly deals with the question of whether the bank of israel should have raised interest rates in order to deal with the problem of housing prices. we must remember that the interest rate affects a variety of variables in the market : the exchange rate, the level of investment, and more. if we raise the interest rate just to deal with housing prices, it will cause an appreciation in the shekel and a slowdown in economic growth. this is the trade - off we must constantly take into consideration. we need to remember that the main factor in the increase of housing prices is the lack of supply. the increase in prices has led to the expected supply response : an increase in the number of building starts. this rate, which was 30, 000 units

per year, reached 44, 000, which is a significant increase. however, the rate of land marketed by the state then declined, and the rate of building starts fell to 40, 000 per year. according to the israel lands administration, the problem is with the authorities approving building plans, without whose approvals they cannot continue marketing land. the way to handle housing prices must come from the supply side. what we cannot do is to use the interest rate, which is a policy tool that affects the entire economy, only to handle housing prices. people tell us that we took too heavy a responsibility on ourselves in terms of housing prices. this reminds me of those who argue that the chairman of the federal reserve, ben bernanke, releases the government from its responsibility to stabilize the economy by doing everything he can to spur its growth. we do what we can, and i wouldn ’ t want to cause damage to the entire population in order to teach politicians how to act better. the problem of poverty in israel is not easy to solve, since poverty is concentrated mainly in two population groups – the ultra - orthodox and the arabs – although this is not to minimize the problem of poverty among the rest of the general population. however, among the ultra - bis central bankers ’ speeches orthodox, less than half of men participate in the workforce, and among the arabs, just 20 percent of women work. therefore, we cannot deal with poverty by providing grants that will raise all of the poor above the poverty line due to the effect such a policy will have on employment incentives. we will need to find a solution to this complex problem. observing both historic and expected demographic trends shows continued growth in the arab and ultra - orthodox segments of the population. if these labor market trends continue, we will reach a situation where half of the population belongs to sectors where labor force participation is low, while the other half finances it. this won't happen, because we cannot continue to be in such a situation, and the relevant population groups understand this. other challenges that the economy will need to deal with over the long term include improving achievements in the educational system and reducing bureaucracy, which weights heavily on economic activity, as reflected, for instance, in the world bank ’ s “ doing business ” index. all in all, the israeli economy is a success story. if we think about the history of the economy, the security situation, the challenges that we have met, we have succeeded in building a flourishing economy. as