Israel Approves Consumer-Price Boosts as Part of Austerity Plan to Aid Economy

The government of Israel moved to head off budding economic problems Sunday by approving a package of austerity measures that will effectively reduce the value of workers’ pay by increasing the cost of numerous basic consumer goods and government services.

The measures came just two weeks after a governing coalition was formed between Prime Minister Yitzhak Shamir’s rightist Likud Party and Finance Minister Shimon Peres’ center-left Labor Party. Many observers felt the action was long overdue, having been postponed for political reasons during the 1988 election year.

In announcing the program, Peres said that Israel could not rely on the United States, which already supplies about $3 billion in military and economic aid, to help the country out of its current economic woes. Officials in Washington have been saying for some time that, because of a squeeze on the U.S. budget, the level of assistance to Israel could not be increased.

In any case, Peres said flatly, “We don’t intend to ask for more aid from the United States.”

The immediate impact of the austerity package on the buying power of Israeli wage earners appeared striking. Prices were raised on a host of subsidized goods, including milk, bread, eggs and chicken. Gasoline prices rose by between 6% and 7%.

Shekel Devalued Again

The shekel was devalued by 8%, which, coupled with an earlier 5% devaluation, means a total 13% reduction in its value in relation to European and American currencies within a week. The devaluation will raise prices of numerous imported goods, putting further strain on family budgets.

At the same time, the government plans to hold down increases in the minimum wage designed to compensate for higher prices. In effect, according to government officials, the purchasing power of an average paycheck will fall back to 1987 levels, a decline of 6%.

Government officials tried to stress the long-range benefits--in terms of economic growth and reduced inflation--of the short-term hardships caused by the falling value of wages. “The choice of the public in Israel is between unemployment or growth . . . between the shekel losing its value and the shekel regaining its strength,” Peres said.

Michael Bruno, head of Israel’s central bank, declared: “What this program has a good chance of achieving is the stabilization of real income initially and then renewed growth of real income . . . as the (nation’s) growth rate picks up.”

The economic recovery plan includes a $600-million reduction in government spending, the dismissal of up to 10,000 workers from government payrolls and an increase in fees paid by the public for services, including health and education. If events follow design, inflation and interest rates will fall, making loans cheaper and stimulating production.

Devaluation should help sales of Israeli products abroad by making them cheaper. Also, tax breaks for industry and the easing of rules on foreign investment are also in store in hopes of attracting money from abroad.

There was plenty of skepticism about the chances of the plan’s succeeding. Critics declared that devaluation of the shekel was long overdue and, when finally accomplished, less than needed. They blamed the delay on fear of inciting public wrath before November’s parliamentary elections.

“We are too late in taking steps by a year,” economic analyst Yuval Eli Tsur said. “This was perhaps the most expensive election economics we (have) had in years.”

Some observers doubted that the budget could be slashed drastically. They point to resistance to cuts in the defense budget, which is being strained by the country’s need to combat the Arab uprising in the occupied territories.

“The main question is the magnitude: Will the steps actually be taken? Will the budget cut actually be taken?” asked David Lev-Ari, a Hebrew University economist.

The Histadrut, Israel’s giant 1.5-million-member trade union federation, pledged to fight several points of the program. First, officials said Sunday, they will ask for full cost-of-living adjustments for workers in low-paying jobs. Second, they want price controls clamped on the economy as well as financial support for distressed industries that employ many of their members.

Israel is going through a recession, with virtually no growth registered in the economy last year. Unemployment reached 8% of the Jewish labor force in Israel; among the Arab minority, it was higher. Inflation is now at an annual rate of more than 17%.

Uprising Hurts

Part of the downturn stems from the Israeli-Palestinian conflict, a problem beyond the reach of the economic program. Rebellious Arabs in the West Bank and Gaza Strip have reduced purchases of Israeli goods by 30% during the past year. Frequent strikes by Arab workers have depressed the Israeli construction industry, which relies on them for labor.

In all, the unrest has lopped perhaps 2% off Israel’s growth rate, economists estimate.

The plan announced Sunday caps a clumsy debut by Peres as finance minister. He moved from the Foreign Ministry when the new government was formed.

Peres ordered a 5% devaluation last week but then had to reverse himself when companies complained they would have to make year-end adjustments to their books if the devaluation was not held off until the last day of 1988.

The 5% adjustment was designed to calm a highly speculative market in dollars, but it had the opposite effect. Sensing that a further devaluation was on the way, buyers scurried to buy more foreign money as a hedge.

The rush drained $300 million from Israel’s foreign reserves, and on Friday, the Bank of Israel froze sales of foreign currency until Tuesday to stop the buying of dollars.