##s was sacrificed together with the program for sweeping tax reforms, although it is quite simple to do what is necessary without reference to any other reform. what needs to be done is to introduce one low rate of tax, say 5 percent on average, on all interest income above a certain threshold ; that threshold should be determined in such a way that on the one hand it is not worth the trouble of deducting the tax at source, and on the other it is justified on social grounds. the change should be planned in such a way that it is neutral with regard to the total revenue obtained, i. e., the drop in tax revenues on one side should be matched by increases on the other. it is important to ensure that the collection system is simple as far as the definition of the tax base is concerned, and to set a lower rate, say 4 percent, on nominal interest, and a slightly higher rate, say 6 percent, on real or foreign - currency interest. this change could be implemented without much preparation, and would be of great benefit to the economy. clearly it should not made effective retroactively. financing an increase in government expenditure by borrowing from the public financing an increase in government expenditure by borrowing from the public ( by the sale of government bonds ) causes damage in the following ways : • the first derives from the fact that the government already has a large debt of nis 430 billion, more than 90 percent of gdp, due to budget deficits in past years. this debt obliges the government to allocate part of its tax revenues each year to service the debt. in 2001 this interest payment will total some nis 30 billion, more than the total education budget, and several times larger than the government ’ s investments. the increase in the debt caused by budget deficits reduces the government ’ s ability to use its sources for current purposes, and creates pressure to further increase the debt to enable expenditure to rise nonetheless. • the second adverse outcome results from the effect of the government debt on the rate of interest. in israel, as in every economy, the rate of interest on government bonds is used as a benchmark for fixing interest in the private sector. mortgage interest rate is determined in this way, and interest on long - term loans, both those advanced directly by banks and those issued in the form of private bonds on the stock exchange is based on the interest the market requires from the government on bonds it issues. in other words, the greater the

scandinavia all the time, where labor productivity is very high. it is important that we deal with all the challenges in education, the bureaucracy, infrastructure and more, in order to deal with the problem of low productivity. the supervisor of banks headed a team that presented important conclusions regarding reinforcing banking competitiveness. each time i would meet a senior banker from abroad, i would try to convince him to start banking operations in israel. i didn ’ t succeed, and since 2008, i have stopped trying since the crisis led banks to stop expanding their operations overseas. however, at the team ’ s recommendation, there are many steps whose implementation can help reinforce competitiveness in the banking system. bis central bankers ’ speeches defense expenditures increase from year to year, although their share of gdp continues to decline and has now reached its level from the beginning of the 1960s. still, defense expenditures are the largest component in the state budget. it is clear to all of us that we live in unsafe and uncertain surroundings. it is the government ’ s duty to protect its citizens, and there is therefore no alternative to large budgets for the defense establishment. this also has positive ramifications, such as the defense establishment ’ s contribution to the development of the high - tech industry. we do not have the luxury to think that we are sweden and to plan our expenses without needing to allocate about 5 percent of gdp to defense. we must continue to provide ourselves with defense, but the allocation of more money to defense is not the only solution. we must also try to find other solutions, and try to achieve a peace agreement with our neighbors, including with the palestinians. the phrase, “ there is no partner for peace ” is a self - fulfilling phrase. you need two for an agreement, and if we don ’ t want to look for a partner, we will remain in the current situation. we must look for the partners for peace. until we reach agreements, it will cost us more since we will need to reinforce our readiness. however, in the long term, we will benefit from it, and it will have positive ramifications in various areas. we must, therefore, find a way to act more proactively in order to stop the conflict that has continued here for far too long. bis central bankers ’ speeches