Peres to Curb ‘Printing-Press Money,’ Israeli Diplomat Says

Israeli Prime Minister Shimon Peres, in a new effort to qualify his country for more U.S. aid, has promised to support restrictions on Israel’s inflationary “printing-press money” and to adopt other austerity measures, an Israeli diplomat said Sunday.

Peres outlined the measures his coalition government is prepared to take in a letter to Secretary of State George P. Shultz, the former economics professor and secretary of the Treasury who has demanded economic reforms as a condition for as much as $1.5 billion in additional aid. Israel, the largest single recipient of U.S. aid dollars, already has received $2.6 billion this fiscal year.

Shultz is expected to discuss the proposed package May 10, when he is scheduled to visit Israel on the first leg of a Middle East trip that also will take him to Jordan and Egypt.

The new package was based on 10 “benchmarks” laid down by Herbert Stein, a former White House economic adviser who is serving as Shultz’s top expert on the Israeli economy. Stein visited Israel last month.

“Peres said that some of the benchmarks are reasonable, and we are proceeding with them,” the diplomat said. “Others are more difficult and will take time.”

Israel’s government budget exceeds the country’s gross national product, making it mathematically impossible for the government to finance its programs by taxation. In recent years, the government has handled its budget deficit by borrowing Israeli shekels from the Bank of Israel, which obtains the money by printing huge quantities.

Unlike the Federal Reserve Board, which controls the U.S. money supply, the Bank of Israel is not independent of government control and is therefore unable to play a restraining role.

The diplomat said the top item on Stein’s list is to make the Bank of Israel an independent body. The diplomat said Peres promised to support such a step, although, as Peres pointed out, it requires legislation passed by Parliament, which may take some time.

The diplomat said Peres also accepted Stein’s call for new curbs to prevent government agencies from overspending their budgets.

Under existing regulations, departments regularly spend more than their budgets call for, rendering budget cuts essentially meaningless.

However, the diplomat said, Peres balked at Stein’s plan to prevent banks from offering accounts that are automatically adjusted to compensate for declines in the value of the shekel. Stein complained that these accounts help to fuel Israel’s nearly 1,000% inflation. But the accounts are so popular in Israel that the government would almost certainly fall if it started to tamper with them.

The U.S. Administration has already recommended $3 billion in military and economic aid to Israel during the fiscal year that begins Oct. 1. The package is expected to win easy approval in Congress.

However, the Jerusalem government is seeking an additional $800 million in “supplemental” assistance for the current fiscal year, which has just five more months to run.

At Shultz’s urging, the Administration has withheld approval of the supplemental appropriation for this year pending Israeli economic reforms. However, the House Foreign Affairs Committee, overriding Shultz’s objections, recently approved an $800-million supplemental appropriation for the current fiscal year and, in addition, voted a $700-million increase in the aid package for the coming year.

The Israeli diplomat said Peres opposed austerity measures that are likely to increase unemployment. For years, Israeli government policy has emphasized low unemployment.