Bank of Israel Governor Stanley Fischer said the economy is likely to expand almost 5 percent this year, higher than the bank's official estimate, while the budget deficit will probably will be less than forecast.

"If we were to revise our 2007 forecasts now, it would be closer to 5%," Fischer said at a briefing for the foreign press in Jerusalem Monday. That assumes global growth stays strong and Israel's security situation remains stable, he added.

The central bank had forecast growth of 4.6% for 2007, the fifth consecutive year of expansion, driven by exports from technology companies such as Nice Systems Ltd. and foreign investment in Israeli start-ups. A rally in share prices over the past three years has sent the Tel Aviv Stock Exchange to an all-time high.

The government's 2007 budget deficit may be about 2% of gross domestic product, compared with the Finance Ministry's target of 2.9%, Fischer said. The planned deficit was set after the Lebanon war, and was based on a GDP growth forecast of 3.8% for 2007, while it is now clear that growth will be higher, he said.

The economy is in "remarkably good shape" in light of the July-August Lebanon war, Fischer said. The government's responsible fiscal and monetary policy, the success of Israeli businesses abroad and global economic growth are all boosting economic expansion.

Israel's government and private industry combined now own more assets abroad than foreigners own in Israel, Fischer said.

"That's a new development, a pretty amazing development," he said.

Fischer said the fact that inflation is below the bottom limit of the 1% to 3% target range set by the government "isn't terrible, but it's not a success either."

While the Bank of Israel would prefer to be within the target, if there is a deviation, it's better to be below the target than above, he said.

Israel's three biggest economic problems are public sector debt, unemployment and poverty, the central bank governor said, though all may now be improving. The cabinet decision to adopt the Finance Ministry's anti-poverty plan, which includes a negative income tax for the low paid and subsidies for childcare for working mothers, is "a step in the right direction."

Public sector debt, currently at 88% of GDP, ought to be gradually reduced to 60%, the upper limit set for European Union countries, "or even lower," Fischer said.

The government also needs to focus on changes in the education system at all levels, from primary through university.

"For an economy without natural resources, the reform of the educational system is absolutely critical," he said.