Governor of the Bank of Israel Stanley Fischer criticized Prime Minister Benjamin Netanyahu's decision to increase the government's deficit goal for 2013 to 3% - 0.5% over the Treasury's recommendation of 2.5%.
The decision means that the government can suspend the decision to raise VAT rates by 1%. The latter, set to take effect on July 1, would have generated the State an additional NIS 5 billion in revenue.
The move is also meant to avert raising taxes, although Finance Minister Yuval Steinitz said Thursday that the government may have to raise some taxes regardless.
"The government's plan to increase the deficit it unreasonable," Fischer said. "This is exactly how we ended up with high inflation rates several years ago," he warned.
"To those who say the difference between 2.5% and 3% isn't that bad – next it will be 4% and the rest is clear. This is why there's a set inflation goal – so it won't keep increasing it."
Should Israel find itself in the midst of a recession the deficit will expand rapidly, he added. "The market might end up in the same lame condition it was in the 1970s."
Fischer also warned that Israel should steer clear of a situation that would compel it to ask the United States for monetary assistance: "In 2002-2003 we had to ask Uncle Sam for help. This uncle isn’t as rich now, and regardless, a sovereign state must be able to sustain itself."
The Israeli market is a small and free economy and as such "It is susceptible to the fluctuations of world market," he said, alluding to the eurozone crisis. "While chances of the eurozone breaking up are low, they still exist," he said.