by high levels of inequality and poverty. inequality in economic income – income before taxes and transfer payments – is not exceptional by international standards. but the tax and transfer payments policy is less active than in other countries in reducing inequality. therefore, inequality in disposable income – income after direct taxes ( which are progressive ) and transfer payments ( benefits ) – is high. inequality is not predestined. in the same way, the dimensions of poverty in economic activity are not exceptional, but the government ’ s policy to reduce poverty, which is relatively modest, is reflected in a particularly high poverty rate by international standards in terms of disposable income. bis central bankers ’ speeches the trends i have outlined, or a low productivity growth rate, processes that are expected to further slow future growth, together with high levels of poverty and inequality in disposable income, bring into sharper relief the need to focus government policy on encouraging productivity and reducing inequality and poverty. so what can we do? we can continue, with greater vigor, implementing ( with emphasis on the term implementing ) policies to include population groups in employment ( the program to reduce gaps with the arab community that was supposed to have been discussed by the government included many positive components in this area ) ; act to increase human capital – both in the framework of the education system and through professional and technical training – in order to increase productivity an earning power ; act to remove impediments to growth, through investment in infrastructure, improving the business environment, increasing competition in industries where it is insufficient, promoting reforms in essential infrastructures, and supporting r & d, including in low technology industries. there is also room to upgrade the public services, and for adjustments in the tax system through benefits – for instance by increasing the earned income tax credit ( negative income tax ), and more. if we act decisively to implement multi - year plans, most of which exist but are implemented sluggishly, we will be able to maximize the immense potential of the israeli economy for the good of all its citizens. bis central bankers ’ speeches

balance. here is where the credibility of the government enters : - in the eyes of the israelis - if their trust in the government ’ s ability to maintain fiscal control will be shaken ; and if they will loose their confidence that the government is indeed committed to price stability - they will draw the conclusions. the relative balance in the foreign currency market will be replaced by excess demand. - from similar episodes we know that it is the domestic sector that reacts first, but that foreigners follow suite. right now they just reduce their domestic currency risk. the situation does not justify going beyond that, although foreigners have reduced some of their traded portfolio in israel. on the wayside stand foreign analysts and rating agencies. they publish newsletters, interview policymakers, collect data and offer their considered view to their customers and the public. we know their agenda : fiscal discipline, price stability, low public debt, stable financial system, structural reforms. they are not very good in seeing the future, but they are very quick to join the party in its early phases. for them too, perhaps especially for them, the credibility of the government is all - important. * * * hence, a government that starts by raising the deficit, especially after a year where the deficit is expected to be larger than planned, is already on an inferior ground and has to do more to convince the public that its commitment, to reduce the deficit in the following years, is credible. what can it do? the first thing is to confine the increased level of spending to investment, put a lid on current expenditures, and show it explicitly. the government ought to ratify not only the ceiling on total spending for 2002, but also its breakdown to current and capital expenditure, and present the figures in comparison to the estimated figures for 2001. it is one thing to borrow more for investment, and completely another - to borrow more to finance current spending, even if it is called teachers ’ salaries, hospitals ’ maintenance and poverty reduction programs. the approved capital spending aggregate ought to be accompanied with a list of projects and time - table for their implementation. finally the government ought to discuss, and publish to the public, a quarterly report on the budget execution, compared to its plan. the second thing is to make absolutely clear that the government is committed to price stability. hence : - if somebody says that short - term interest should be reduced, he should also add : provided that it does not undermine price stability ; - if somebody says that we should follow in