Cabinet Approves Neweconomic Program

The Cabinet early Tuesday morning approved a new economic program which its proponents say will stimulate economic growth and exports, curb inflation and assure economic stability without causing hardship to wage-earners or increasing unemployment.

The main features of the plan, agreed to after an exhausting all-night session and intensive consultations with labor and management, are a 10 percent devaluation of the Shekel; a 400 million Shekel reduction in the national budget; some minor tax reforms; and a new levy on education.

Although the prices of some subsidized goods and services will go up as a result of devaluation, they are expected to be neutralized by wage-price constraints agreed to by Histadrut and the Manufacturers Association. A proposed 30 percent hike in transportation fares was dropped. The price of gasoline was not raised. A total price freeze will be in effect until April.

DEFENSE BUDGET EMERGES UNSCATHED

The budget itself, the subject of fierce debate within and outside of the Cabinet for the past month, emerged with the defense budget unscathed. The modest 80 million Shekel cut in defense expenditures urged by Finance Minister Moshe Nissim with the support of Premier Yitzhak Shamir was voted down by a majority of the Ministers, a singular victory for Defense Minister Yitzhak Rabin. The 80 million Shekels will be excised instead from the budget reserves.

A major and even more controversial change of policy was the decision to impose an annual education tax of between 100-400 Shekels per child, the amount contingent on the parents’ income. The Cabinet thereby deviated from the principle of free compulsory education which has been in effect since the founding of the State.

But according to government sources, about 43 percent of the population will be exempt. Parents of more than three children, residents of development towns and families with a monthly income of 1,000 Shekels or less will not have to pay the tax.

MAJOR TAX REFORM PLANS ABANDONED

The Treasury’s ambitious plans for major tax reforms, including the elimination of loopholes and exemptions, went by the board. What emerged in the new economic program was a reduction of the top income tax bracket from 60 to 48 percent on incomes of up to 9,000 Shekels a month. Families earning more will pay a surtax of 53 percent on the difference. Corporate taxes were put in the 40 percent bracket.

Under heavy pressure from Histadrut, the Finance Minister was forced to abandon plans to eliminate tax exemptions for new development towns, working mothers and the handicapped. Nissim also backed away from health care fees. Histadrut called those proposals anti-social and regressive.

The 10 percent devaluation of the Shekel may have the greatest impact. Nissim gave assurances Tuesday that it would not usher in a new era of periodic devaluations.

The Tel Aviv Stock Exchange reacted favorably. Virtually all shares advanced in price Tuesday. Investors were apparently convinced that the currency rate adjustment will spur exports and business in general.

A ONE-TIME ACTION

At a joint press conference with Vice Premier and Foreign Minister Shimon Peres, Histadrut Secretary General Yisrael Kessar and Dov Lautman, chairman of the Manufacturers Association, Nissim declared:

“Let me assure our public that this is a one-time action … It will not upset our hard-won stability … We have seized the opportunities to ensure that the effects of the devaluation are neutralized … and therefore the exchange rate will stand for a long time to come.”

The official rate now stands at 1.64 Shekels to the Dollar and 1.68 Shekels to a “basket” of currencies.

By “neutralization,” Nissim was referring to the government’s decision to waive 2.7 percent of employers’ payments to National Insurance and Histadrut’s agreement to waive 2.7 percent of cost-of-living increments occasioned by devaluation. But Kessar warned that if inflation rose despite these efforts, Histadrut would demand that the full COL increment be paid.

Peres and Nissim maintained that the new economic plan “created the conditions for a continuation of the stability in the economy and renewal of growth.” Its purpose, they said, was to avoid unemployment and not widen the social gap. They contended that industry and exports would benefit.

The entire plan is subject to approval by the Knesset where it is expected to encounter some stiff opposition. Three motions of non-confidence were introduced Tuesday by Mapam, the Hadash (Communist) Party and the Progressive List. Yair Tsaban of Mapam attacked the tax reform measures. He said they would cost the government upwards of 1 billion Shekels in lost revenues. But President Chaim Herzog called on the nation Tuesday to “continue giving unified support” to the efforts for economic recovery.