Israel Hopes New Wage, Price Controls Will Bolster Case for Increased U.S. Aid

Israel hopes that a comprehensive new wage and price control agreement signed late Thursday night will bolster its case for a sharp increase in American aid over the next 20 months, a senior economic official said Friday.

The official, who spoke on condition that he not be further identified, said neither the new agreement, designed to slash $1.2 billion in price subsidies from the government budget, nor other planned austerity measures will be enough to put the economy back on its feet. “So you can say it this way,” he commented. “ ‘Now look gentlemen’--and now I’m talking like to the Americans--’we tried to do our best and we cut all of this expenditure that affects our economy. But now we need a little bit more. . . . And we need this aid from you.’ ”

Israel has requested nearly $5 billion in U.S. aid between now and Oct. 1, 1986, in addition to the $2.6 billion already granted for the current fiscal year. The total includes $800 million in emergency grants for this fiscal year and $4.1 billion in fiscal 1986.

Austerity Measures

Washington has deferred consideration of the $800 million emergency aid request pending Israel’s enactment of tougher economic austerity measures. The Congress is expected to take up the fiscal 1986 request within the next few days.

“I hope that this decision that we made in the last few weeks should help us in this request,” the senior Israeli official said.

The new wage and price control plan was put in final form by Israel’s government, its trade unions and its industrialists in a series of all-night meetings this week. It replaces a three-month wage and price freeze implemented last November and scheduled to expire Feb. 4.

The cornerstone of the new pact is a 75% reduction in the level of government subsidies for such essential items as fuel, water, electricity, bread and dairy products. The action will bring down the cost of subsidies from $1.6 billion annually at their old level to $400 million in the year beginning April 1, the official said.

Employers and workers will share the burden of the resulting cost increases, with the workers carrying more of the economic burden at the outset and the employers more during the balance of the eight-month agreement.

In place of the old automatic wage increases tied to the cost of living, workers will be given flat monthly payments during the first three months of the new agreement to compensate them for higher prices resulting from subsidy cuts. The new system is expected to provide less than half the cost-of-living protection that workers would have enjoyed under the old system.

Israeli press reports Friday forecast an average 7.5% drop in inflation-adjusted wages during the next three months.

“We signed the deal with deep trepidation over the fate of the workers and of the economy,” Yisrael Kessar, secretary general of the Histadrut trade union federation, said.

Later in the course of the agreement, the employers will absorb up to 3% a month in cost-of-living protection for their employees--money that the government previously refunded in full to the employers.

The system by which Israeli workers’ salaries are linked to the consumer price increase has been criticized as one reason for the country’s runaway inflation, which reached a record annual rate of nearly 1,300% just before last November’s “package deal” wage and price freeze. Inflation for the year as whole was 445%.

Prices of non-subsidized goods will also rise under the new arrangement but at a pace intended to keep the monthly inflation rate in single digits. (If prices go up by 9% per month, the annual inflation rate would be 181%.)

Price Control Panel

The agreement creates a tripartite price control committee, with government, union, and employer representatives to oversee price increases.

Manufacturers will be allowed a one-time price increase of up to 20% next month at the end of the current price freeze, the Israeli official said. The amount will vary according to industry and will be based on the level of cost increases experienced during the freeze period. The system is expected to allow the largest price increases to be made by firms that import large amounts of raw materials or components--the firms that have been hardest hit by the freeze.

The average price increase for all non-subsidized items is expected to be 5% at the beginning of next month, the official said.

Then, after the one-time adjustment, prices will be allowed to increase by 3% to 5% monthly as approved by the committee.

At the same time, the Israeli official said, the government has agreed to cut its budget by $1.1 billion in addition to the cut in subsidies. That would mean a total reduction in government spending of $2.3 billion, or about 10%, during Israel’s 1985 fiscal year, which begins April 1.