. we have started to deal with this problem as well through the zaken committee and we have required that the banks issue a banking id card to customers, which as i mentioned will be sent to bank customers in the coming days. in addition, we are promoting the creation of a central credit register at the bank of israel which will complement the work we have started with the banking id card. by means of directives issued by the banking supervision department, we have worked to reduce bank fees and the cost of banking services, in cases where we have found that a market failure exists. and again, it must be emphasized that the effect of some of these changes is not felt immediately. the recommendations of the zaken committee were implemented over the last few years and it is reasonable to assume that when their full effects are felt, we will see an increase in the level of competition. the bank of israel believes that these measures to increase competition between existing entities are not sufficient and therefore we have created a less stringent supervisory environment for nonbank entities, such as the separated credit card companies or companies that will provide large - scale credit against the issue of bonds. this new category will encourage the activity of these entities, in the recognition that regulation in this case can be less stringent since their activity is not financed by deposits. in other words, the supervision will be riskadjusted. this policy will facilitate the entry of new competitors into the area of credit and acquiring. finally, as is known, the minister of finance and i established the strum committee and the bank of israel is taking a leading role in the work of the committee and in formulating its recommendations ( and many important ones have not generated any controversy or public discussion ). one of the main recommendations of the committee is the separation of two of the credit card companies from the large banks. however, it is important to understand that the credit card companies have systemic importance for the economy and therefore must continue to be supervised by the bank of israel, on a risk - adjusted basis. the transfer of supervision over these companies from the bank of israel to a regulator with a different focus and different expertise raises a real concern that the damage from separating the credit card companies will be greater than the benefit. all of the many steps to improve competition have been carried out responsibly and after a professional and comprehensive examination of the potential benefits and risks involved. it is possible to promote competition without harming stability. we have seen what happens when financial entities

##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