The recession could be shortened by reaching an accord with labor representatives, Bank of Israel governor David Klein wrote in an opinion paper released today.

Labor leaders, with the Histadrut labor federation spearhearding the charge, have been agitating for cost-of-living raises after the June consumer price index rose by more than expected, lifting inflation to

In his paper ahead of the government debate on the 2003 budget, the governor warned against shocks to the national spending agenda.

"We cannot afford another deviation in implementing the budget, of the kind we experienced in the first half of 2002. Any such deviation would mean less stability and less jobs," warned Klein.

"It is possible, and necessary, to shorten the recession by reaching an agreement with the Histadrut and employers on wages and deriving issues," he added.

He called on the government, the labor representatives and employers to reach a consensus framework to maintain real wages. Salaries automatically crawl up anyway, Klein noted, due to cost of living and other additions. But raises must not be allowed to exceed the level of maintaining real wages, Klein said.

Economic growth can only be restored through determined fiscal action, he added. Encouraging investment requires lowering real long-term interest rates, which can only be achieved through reducing the government deficit, Klein opined or when the public believes the government's statement that the deficit will shrink.

However, the government's credibility in the eyes of the public, regarding the deficit, has eroded in the last two years, Klein noted. Moreover, returning to the path of a declining deficit is not the only test that the government's fiscal policy faces to meet its goals, he said: the structure of the budget must be changed.

He called on the government to increase the weight of investment in infrastructure at the expense of ongoing spending. Currently investment in infrastructure commands only 2% of the budget. Increasing it can only be achieved through fundamentally changing the government's attitude in three areas: maintaining but not increasing real wages in the civil service; cutting the defense budget; and returning welfare-dependent adults to the workforce.