that, following liberalization, the israeli economy is now completely open to the free flow of capital. as for inflation, the bank of israel continues the policy of maintaining price stability. looking back over the past 12 months, inflation has reached 3. 5 percent, half a percentage point above the upper limit of the government's inflation target range. however inflation is expected to return to within the range soon. at the same time, forecasts and expectations of inflation from the capital market are around the middle of the target range – at about 2 percent – with the markets and forecasters estimating that the interest rate will rise by about half a percentage point by the end of the year. apart from two central problems that need treatment – poverty and the burden of debt in terms of gdp – the economic situation is very good. this reality is the result of a number of factors : background and policies. the background factors are the global economic development and the security situation. for example, if the global economy slows down or even falls into a recession, this will affects us. but the international economy is not dependent on us, and the security situation is not solely dependent on us. in contrast, the policy factors are dependent on us. i am referring, of course, to the government's budget policy, and the bank of israel's interest rate policy. the combination of these policy factors create the macroeconomic framework of the economy. in recent years, this macroeconomic framework has contributed a great deal to recovery, then to the consolidation and now to continued strong growth. the macroeconomic framework and the structural reforms that the government has instigated in recent years – and which the finance minister told us yesterday, on this very podium, that he intends to continue – are very important also for sustainable and fast growth. and when i say sustainable growth i do not mean permanent growth, because there is no such thing. there are business cycles and one assumes that sometimes, though i hope not often, we will need to cope with periods of low growth ( a slowdown ) or even a recession. so when i talk about achieving strong and sustainable growth, i mean policies that will support on average, high levels of growth, and for as long as possible. and in order to build this framework the right economic planning requires first of all a sensible budget policy. i wish to stress this point, particularly in light of several matters that we must address when discussing the government budget for 2007. recently, with the

finances. this would incidentally also make mortgages cheaper for homeowners, among them young couples. thirdly our heavy government debt burden brings with it high government expenditure of debt interest payments. in 2005, for example, some nis 33 billion – 15 percent of the total government budget – was to cover debt interest payments, and this is the second largest item after defense spending. the smaller the debt, the lower the interest payments become and the government can direct more money to those other needs of the economy, social problems and all. we are very proud, and rightly so, of the impressive advance made in reducing the government budget deficit in recent years, but the actual budget situation is not as good as we think. and when i say that i refer to a problem of definition and measurement of the budget deficit. what exactly do i mean? we are currently in contact with the oecd in order to be admitted as a member and to be accepted as one of the world's developed countries, from an economic perspective. joining the organization will oblige us to meet several conditions to bring us up to the international standards that the oecd demands. one of these is the measurement of government deficit. the definition of budget deficit in israel is different to the international definition. this difference leads to an understatement of the figures, and there are two reasons for this : firstly, in israel, the deficit definition covers only central government, while in the oecd and the eu ( according to the maastricht rules ) the deficit refers to general government, which includes central government, local government and other bodies. and secondly, in israel the indexation component of government expenditure for the part of the debt that is indexed to the cpi is not shown, while internationally this component is also included. to give us an idea of what i am referring to, these differences in definition account for almost 2. 5 percent of gdp. in other words, if according to the israeli definition, the government reported a deficit of 1. 94 percent of gdp in 2005, then according to the international definition, this was a deficit of 4. 5 percent of gdp. these figures, according to the international definition, are published in the bank of israel's annual report. i am not saying that there is a definite intention to mislead. absolutely not. but the time has come to start a process of change that will bring israel into line with the rest of the world in