Cabinet Approves National Budget of Il 122.5 Billion for Fiscal 1977-78

The Cabinet approved an IL 122.5 billion national budget for the fiscal year 1977-78 last night without the endorsement of Histadrut and with defense spending still undecided. The new budget is one percent less than the current budget and IL 4.5 billion under the originally proposed budget for the new fiscal year.

It is called an anti-inflationary budget and is predicated on the assumption that the government will be able to hold the line on spending within its own departments and persuade labor and management to maintain wage-price stability. An inflation rate not exceeding 25 percent is projected. The budget was approved unanimously with one abstention by Absorption Minister Shlomo Rosen of Mapam.

The Cabinet did not deal with the Defense Ministry’s demand for an additional IL 500 million to meet its minimal needs next year. A special committee consisting of Premier Yitzhak Rabin, Finance Minister Yehoshua Rabinowitz and Defense Minister Shimon Peres will meet shortly to try to reach a compromise. Government sources said the defense budget will remain within the limits of the approved budget.

GOVERNMENT’S HARDEST TASK

The government’s hardest task will be to gain the cooperation of Histadrut on the wage front. The trade union federation’s initial reaction to the new budget indicated that tough negotiations are in prospect, especially over the government’s decision to reduce cost-of-living allowances. According to Histadrut sources, “even if the government manages to keep inflation at 22 percent Israel will have record high inflation and the proper compensation must be paid.”

The government apparently intends to use a carrot-and-stick formula in dealing with Histadrut. If the latter cooperates, labor would be rewarded by a general price freeze, at least until April, after which prices would remain under strict controls. If not, the penalty would be an increase in the value added tax. The original budget proposals called for a 5 percent hike in the VAT, but that was eliminated in the final draft. The VAT, established this year, is currently 8 percent.

ECONOMIC MEASURES LINKED TO BUDGET

Other economic measures linked to the new budget include a maximum 30 percent rise in the prices of basic commodities instead of the 40 percent rise originally anticipated and a maximum 25 percent hike in telephone, electric and water rates. This would hold down the overall cost of living index increase to 25 percent. Interest rates on loans to industry, housing and agriculture would rise by 2-3 percent. Government bonds linkage to the cost of living will be held at 80 percent.

Allowances for children, a fixed sum paid monthly by the National Insurance Institute for each child, and credit points for tax purposes would be held to 70 percent of the c.o.l. index instead of the present 100 percent. Companies will not be allowed to pay dividends in excess of those paid in 1976. Finally, the budget calls for a 20 percent devaluation of the Pound during fiscal 1977-78 instead of the 25 percent originally planned.