Economic Crisis Raises Concern

The government’s inability to introduce the drastic spending cuts necessary to alleviate the economic crisis has raised concern among policy-makers over what might occur when the three-month wage-price freeze package expires in January.

The freeze, instituted last month, was seen as a temporary means of curbing inflation while the government utilized the “breathing spell” to hammer out an economic policy of austerity which virtually all economists consider urgent.

But the measures taken to date fall for short of the austerity goals and were agreed to only after bitter wrangling among the various ministries over where the axe would fall. The unity government, indeed, authorized a $1 billion slash in the State budget when it took office last September. But Finance Minister Yitzhak Modai has argued strenuously since then that an additional $500 million cut is necessary, at the very least.

ADDITIONAL $395 MILLION CUT RECOMMENDED

Last week, an ad hoc committee of four, headed by Modai, recommended an additional $395 million cut in the national budget. Other members of the committee are Economic Minister Gad Yaacobi and Ministers-Without-Portfolio Ezer Weizman and Moshe Arens.

But they ran into trouble when they brought their proposals before their colleagues at a stormy five-hour special session of the Cabinet last Friday. The outcome was that the recommended cut was whittled down to $365 million. The stiffest opposition to the proposed cuts come from the ministries with the largest budgets: Defense, headed by Yitzhak Rabin; Housing, by David Levy; and Education, by Yitzhak Navon.

The failure to introduce the drastic budget cuts most economists consider necessary has raised the spectre of higher taxes. Treasury sources said yesterday that unless the spending cuts are forthcoming, taxes must rise in the next fiscal year even though the highest marginal tax now stands at 65 percent.

Another obstacle to spending cuts is Histadrut’s demands that the Treasury honor existing wage agreements and pay workers their increases when due. Modai offered the wage hikes in exchange for an agreement to raise the prices of subsidized products and services, thus reducing the burden on the Treasury. But Histadrut Secretary General Yisrael Kesser flatly rejected the deal at a lengthy meeting yesterday at Premier Shimon Peres’ residence.

INJECTING MONEY INTO THE ECONOMY

Meanwhile, the Treasury has been forced to inject huge amounts of money into the economy because it is unable to raise the prices of subsidized items. Last month the Bank of Israel printed 130 billion Shekels. This translated into a daily expenditure by the Treasury of 4.3 billion more Shekels than it took in, the equivalent of $200 million, which means further deterioration of Israel’s already dangerously low foreign currency reserves.

The government faces another challenge on the labor front. The Histadrut teachers union announced today that it would stage a one hour “warning” strike tomorrow in support of its demands for pay increments. Modai, so far, has turned them down.