The Economic Situation in Israel
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The Economic Situation in Israel

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The economic good news of recent days has produced a sharp divergence of views between Premier Shimon Peres and Finance Minister Yitzhak Modai over economic policy in the months ahead. Labor and Likud are also clashing bitterly, with each unity coalition partner accusing the other of trying to manipulate the economy to benefit its future election prospects.

Peres, a strong supporter of Modai’s austerity economic program until now, asserted over the weekend that with the inflation rate at a record low of 1.3 percent in January, the time has come to ease restrictions and strive for economic growth and higher employment.

Modai, a Likud Liberal, insists that many more months of economic restraint are needed if the recovery program launched last August is to be a lasting success. “If the (money) presses start rolling again, I shall quit,” Modai threatened in a television interview.


Within the Labor Party, allegations are mounting that Modai and Likud are deliberately keeping a lid on the economy now in order to be able to ease restrictions dramatically after Peres turns over the Premiership to Foreign Minister Yitzhak Shamir, the Likud leader, next October 13, as required by the Labor-Likud coalition agreement.

Likud politicians, for their part, accuse Peres of seeking a coalition crisis to break up the unity government in order to avoid the mandatory rotation of leadership. They charge further that Labor wants to ease the squeeze on government spending in order to pour money into economically ailing Histadrut enterprises such as Solel Boneh, the giant construction cooperative, Kupat Holim, the Histadrut sick fund, and the Labor-affiliated moshavim.

In a television interview Sunday, Peres said “It is not a sin to defend Histadrut firms… I do not want unemployment to break out in the country.” He denied he wants to increase the State budget, but insisted that some government savings should be channeled into industry to promote growth. “Part of it should be used for investment and part returned to the citizens,” he said. The government in fact announced Monday moderate cuts in fuel prices. Gasoline is down three percent and heating oil five percent.

Modai, in a speech to the Association of Chambers of Commerce in Tel Aviv last Thursday, warned, “we cannot help failing enterprises. The Labor Alignment wants to waste the meager resources we have to increase the expenditures of the education, health, agriculture and defense ministries,” all headed by Laborites.

Peres told a Labor Party meeting in Haifa that he wanted to divert $500 million “saved by the government” to aid viable industries that were suffering transient difficulties. He dismissed the Likud claims he was seeking to inject funds into failing Histadrut companies.

The savings have been affected by external developments for which neither coalition partner can claim credit — the plunging price of oil on the world market and the decline of the U.S. Dollar against European currencies. Most of Israel’s exports go to Europe.

Laborites charge that Modai has been quietly sitting on government funds to be able to pour them into West Bank settlements as soon as Shamir takes over the reins of government. Such arguments are directed at the development towns in Israel, which have been starved of funds this past year.


There was an exceptionally vitriolic Cabinet meeting Sunday. Modai responded angrily to Health Minister Mordechai Gur who had called him a “liar” and to Energy Minister Moshe Shahal who accused him of deliberately withholding government funds from his ministry. He told Gur, “I am sick and tired of your fat, self-satisfied face” and suggested that Shahal be given a daily newspaper column to “sound off.”

Modai apologized Monday for “certain expressions” at the Cabinet table. A furious Peres vowed on television that he would not allow such acrimonious exchanges again as long as he is Premier.

This is not the first time an economic debate has taken on partisan political coloration. Well-placed sources close to Peres told the Jewish Telegraphic Agency Sunday that they could not envisage the unity government collapsing over economic policy, especially since Peres himself has been closely identified with that policy.

The Premier’s argument for easing restrictions to promote economic growth was gravely weakened Sunday evening when Prof. Michael Bruno, one of Israel’s leading economists, warned in a telephone interview from London that the achievements of the economic plan — which Bruno helped draft last summer — would be threatened if “growth” became an excuse for easing up too soon. He said real growth should come “naturally” and the economy was beginning to show signs of “natural” growth.


Meanwhile, about 200 mayors and employes of development towns demonstrated outside the Prime Minister’s Office Sunday against what they said was the Treasury’s failure to keep its promises to provide funds to ease their financial crises. They charged that the government created the situation in past years by deferring local budget allocations thereby forcing the towns to take high interest loans.

The protest was bi-partisan. Yossi Peres, Laborite Mayor of Tiberias, said the development towns would go bankrupt because they will be unable to pay their employes or suppliers. Meir Shitrit, a Likud MK who is Mayor of Yavne, said a mere $34 million was needed to ease the crisis and could be raised easily, if the government, for example, levied the full statutory income tax on company and government cars for senior officials. Peres promised to appoint a committee to review their demands.

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