karnit flug : macroeconomic policy and the performance of the israeli economy remarks by dr karnit flug, governor of the bank of israel, to the conference of the israel economic association, tel aviv, 18 may 2016. * * * i would like today to speak about the performance of the israeli economy and about macroeconomic policy – both the policy adopted and the policy that is desirable in the future. it is important to distinguish between policy operating in the short - term, which is intended to moderate the economic fluctuations referred to be economists as “ the business cycles ”, and policy that operates in order to achieve long - term goals with the objective of leading to great achievements in the future. it is important to note that macroeconomic stability in the short term is a necessary condition for realizing long - term goals. in order to ensure macroeconomic stability, policymakers use monetary policy and fiscal policy. monetary policy focuses on maintaining price stability, and on supporting economic activity and employment when there are shocks moderating them. fiscal policy balances the need to support growth in such conditions and the need to maintain a reasonable deficit, manage the public debt burden over time so as to minimize the burden of interest payments in the future, and provide the government with room to operate, referred to as “ fiscal space ” in times of crisis. economic policy that focuses on long - term goals – chiefly inclusive growth over time – operates through the various components of budgetary policy ( size and composition of government expenditure, size and composition of taxes ), and by promoting structural changes and reforms, upon which i will focus later on. the more effective the bank of israel ’ s monetary policy is in creating macroeconomic stability in view of the business cycles, the more it provides the government ’ s budgetary policy with the required room to operate in order to focus policy on dealing with the long - term challenges. the budget ’ s focus on long - term challenges becomes even more important as the term of the budget becomes longer, such as with a two - year budget. economic policy is influenced by various factors, but due to the fact that we are a small and open economy, we are greatly affected by the global environment. the global environment in which macroeconomic policy operates was moderate in 2015 as well, with weak global growth that included a further slowdown in the emerging markets, continued relatively low growth rates in the us and the eurozone, more moderate growth in world trade, and a sharp decline in energy and commodity

addition, wherever possible staff should be recruited to a career track, rather than for a particular job. ii ) to ensure that promotion is determined by output, there should be a mechanism that enables managers to assess an employee ’ s output ; promotion should then be conditional on how well the employee carries out his assignments and meets his targets, and on the periodic assessments prepared by the manager. also, outstanding employees should be given special bonuses for excellence. at the same time, grades should not be granted automatically with seniority, nor allocated collectively. iii ) resolving labor disputes : the system of agreed arbitration should be strengthened, and it should become an important factor in settling labor disputes that are not legal disputes, and it should be become an established part of the process in such cases. at the same time, wide room for manoeuvre should be left for negotiations with representatives of the employees on all subjects which require employee involvement. furthermore, further limitations should be imposed on the right to strike, provided that such limitations are intended to protect the public and the economy and to encourage the solution of disputes. this can be done via injunctions and removing strikers ’ protection against legal action. the changes i have suggested would benefit the general public, employees in the public sector who wish to contribute to the welfare of the public, and the public sector as employer. the outline i have presented is a very broad one, as i said, but the bank of israel will continue working on it. i hope that this will enable us to present a full, detailed, well formulated proposal that will lead to a change in this area. although the task is not a simple one, it certainly needs to be undertaken.