Drastic Fiscal Measures Adopted

Drastic fiscal measures that include a sharp reduction of government subsidies for basic goods and services and an IL 1.4 billion slash in Israel’s defense budget were announced by Finance Minister Simcha Ehrlich last night. The measures are aimed at combatting inflation but will result in an immediate 25 percent price hike for fuel, electric power, water, telecommunications, transportation and basic food items.

The announcement caught Israelis by surprise. The fact that the government took a major economic step that affects the daily lives of all citizens without consulting with or even informing Histadrut, brought cries of outrage from the trade union federation and the Labor Party.

Histadrut Secretary General Yeruham Meshel said the subsidy cuts would reduce many thousands of moderate wage earners to the ranks of the needy. Some economic commentators agreed with him that the lowest income brackets would be hit hardest while the affluent would hardly feel the pinch. Others said, however, that Israel’s inflated economy needed even harsher measures.

Ehrlich said that Histadrut was not consulted because to have done so would have been time consuming and would have compromised the secrecy of the plans. He contended that secrecy was vital to prevent hoarding. It did not prevent traffic chaos in the larger cities and towns as motorists lined up and sometimes fought each other to fill their tanks before the 25 percent increase in gasoline prices took effect at midnight. The price of gasoline went up from $1.71 to $2.10 a gallon.

Ehrlich announced at the same time another 2 percent devaluation of the Pound, now at 9.75 to the U.S. dollar; a 2 percent rise in interest rates on development loans and installment credit; and a net budget cut of IL 2.1 billion. Two-thirds of the budget cut will be realized from the reduction of subsidies. The balance will come from reduced defense expenditures and some IL 900 million from reducing spending by government offices whose budgets will be cut 3 percent across the board, Ehrlich said.

INFLATION RATE TO SOAR

The Treasury expects the new measures to cause a 4.6 percent rise in the consumer price index now and a six percent rise in the near future. This will result in an inflation rate of over 16 percent since January. The Central Bureau of Statistics announced only last Friday that inflation had increased by 10.2 percent during the first six months of the year, the most rapid increase occurring in the second quarter–April-June.

Ehrlich said that the price increases were inevitable. He claimed that the rise in the costs of basic items justified price hikes of 40 percent. But they were held to 25 percent for the time being in order to prevent too sharp an impact on living standards and the general price level, the Finance Minister said.

The Ministry of Commerce and Industry announced later that the price controller has authorized a 20 percent increase in the price of milk and 25 percent for bread. Manufacturers whose products are subject to control will not be permitted to raise prices automatically but will have to apply for permit.

ISRAELIS CAUGHT BY SURPRISE

Few Israelis had expected drastic steps to be taken in the absence of Premier Menachem Begin who is in the U.S. this week for talks with President Carter. The surprise bore the imprint of Begin’s penchant for secrecy in domestic no less than foreign policy matters. Labor Party leader Shimon Peres said last night that Likud has now broken every one of its pre-election promises. He noted that when Likud was in the opposition it has opposed any cut in defense budgets which it has now slashed.

Former Minister of Commerce and Industry Haim Barlev called the new measures a badly thought-out program that would harm all citizens. Some economic commentators observed that the “measures” did not constitute a program at all.

There is no question, however, that Israel is suffering from inflation. The June price index was 128.8 compared to the base of 100 set in 1976, according to the Central Bureau of Statistics. There was a 13 percent increase in the price of fruits and vegetables during the second quarter which ran counter to the normal seasonal trend. Aggregate food prices rose 2.5 percent in June, not including the price of coffee which jumped 335 percent since the start of the year.