Israel Cabinet OKs New Austerity Moves

The Israeli Cabinet on Sunday approved new austerity measures in an effort to ease the country’s latest economic crisis through a combination of tax and price increases, government spending restraints and reductions in imports.

The major goals of the 20-part program, adopted after nearly 14 hours of sometimes-bitter debate by the 25-member Cabinet, are to reduce a drain on Israel’s foreign currency reserves and to slow the near-catastrophic rise in inflation, which reached 19.4% last month, an annual rate of nearly 740%.

However, the measures fell far short of the severe proposals originally made by Prime Minister Shimon Peres and Economic Planning Minister Gad Yaacobi, leading to doubts that they will have lasting effects.

According to a Cabinet spokesman, the new package will involve a tax increase of up to 25% on all products subsidized by the government, including most foods, gasoline and other staples.

Several economists predicted that this will mean a rise of 15% in the tax paid by the public on these items, with the seller bearing the rest of the tax load.

Other measures include a 2% rise in the value-added tax applied to the sale of all goods, boosting that levy to 17% and a 10% to 15% boost in taxes on 58 selected imported products, including automobiles and other so-called luxury items.

Still other measures provide for a three-month freeze on government contracts and a hold for a similar time on the wages of the country’s bloated civil service.

Travel Tax Doubled

One of the most controversial rules doubles from $150 to $300 the tax imposed on any Israeli traveling out of the country, effective immediately. Furthermore, no resident leaving Israel can carry with him more than $800, a 20% reduction from the previous limit.

Yaacobi said that these actions, several of which will require parliamentary approval, will slow the flow of U.S. dollars from the country at a time when Israel’s foreign-currency holdings are in danger of dropping to where it cannot pay its overseas debts.

Several economic experts criticized the measures as inadequate and not likely to seriously slow the inflationary rate, second worst in the world after Argentina’s.

Moshe Mandelbaum, head of the country’s Central Bank, said that some aspects of the program actually will inflame inflationary pressures, namely a plan to allow the printing of $1.2 billion in new shekels, Israel’s fast-depreciating currency.

Although the Cabinet said that the amount of new money to be printed will be reduced next year and stopped altogether in 1987, Mandelbaum commented that “the inflationary spread will continue if $1.2 billion is let into the economy this year.”

The United States, which already has appropriated $2.6 billion in aid for Israel this year, put very strong pressure on Peres to stop printing new money as a condition for providing an additional $1.5 billion in emergency aid.

One Cabinet source said that the agreement to issue new money this year and end the printing of it in two years was a compromise that the United States could accept.