increases imports. this has a bearing on the proposed budget for 2002 : the greatest part by far of the increase in expenditure over the level in 2001 is in current expenditure, with only a small part directed towards increasing investment, and the proposed rise in total government expenditure will almost certainly exceed the rate of economic growth. in other words, the budget for 2002 proposes to increase the government debt by at least nis 12 billion, and to burden it, and the following budgets, with additional interest payments close to nis 1 billion a year, and all this just to increase the government ’ s current expenditure. it is thus possible to contribute to growth by increasing the budget deficit thereby raising the standard of living, both public and private, for a time, but this cannot be maintained, because the rise in the budget deficit creates inflationary pressure, pressure on financial markets, and a rise in the foreign - currency deficit. this is a short - term policy, with part of the bill presented for immediate payment and part carried forward. eventually the outstanding balance of the bill has to paid, and it always comes out very expensive. the composition of the government debt additional damage is caused to the economy, not deriving directly from the existence of the deficit but from the fact that almost half of the government ’ s domestic debt is not tradable. as the government moves to raising unindexed loans, the share of its tradable indexed debt in its total debt falls. in 1995 it made up 30 percent of the total debt ; in the middle of 2001, it is down to 23 percent. the market for tradable indexed government bonds is drying up, and that is the market which determines the longterm rate of interest in israel. a two - pronged course of action is required : 1. the process of extending the term of unindexed government bonds from 10 years to 30 years already started by the ministry of finance must continue, to provide an additional benchmark for long - term interest rates, in addition to the disintegrating benchmark provided by indexed bonds, to encourage the development of long - term unindexed uses in the mortgage market and other long - term projects. 2. at the same time, the chapter of earmarked bonds in pension savings should be brought to a close, as has been done in all other savings channels, to deepen and stabilize the tradable bonds market. this should not be applied to existing funds, including those

national script about recessions and recoveries, financial behaviour and policy frameworks. recessions will occur, as they always have. financial behaviour matters greatly and can, if we are not careful, contribute to instability. in our thinking about the future, we all need to remember that. but if we do, and act with due prudence during the upswings, recessions need not be bad ones and, when they come, we can recover. signposts to that effect ought to be erected along the road to prosperity. applying the lessons the task before us now is to manage a new expansion. of course, we are still in that period when we cannot be absolutely certain that the expansion will gain full momentum. every upswing starts with that uncertainty. the conduct of macroeconomic policies in the near term must grapple with that uncertainty, as it always must do. even so, it is not too early to think about issues of a medium - term nature. the key question is : having had a fairly shallow downturn, how do we make the upswing long and stable, and relatively free of serious imbalances? at least part of the answer is that we will need to re - invest in the same policy discipline, and the same careful private - sector management, that paid dividends in the recent episode. that means keeping tested frameworks in place, amended as necessary in the light of experience. it means unwinding temporary measures as appropriate. it means keeping a focus on flexibility. and perhaps most of all, it means resisting the temptation to assume prosperity is easily achieved, or easily managed. in that spirit, let me offer three observations. first, we start this upswing with less spare capacity than some previous ones. after a big recession, it usually takes some years for well - above - trend growth in demand to use up the spare capacity created by the recession. this time that process will not take as long. most measures of capacity utilisation, unemployment and underemployment are much more like what we saw after the slowdown in 2001, than what we saw after the recession in the early 1990s. this is not a problem. in fact, it is good. it is a goal of macroeconomic policy to try to keep the economy not too far from full employment. and some spare capacity does exist, and will do so for a little while, which is why we think underlying inflation will probably come down a little more in the period ahead