Economic Scene in Israel Modai Offers Upbeat Preview of 1986

Finance Minister Yitzhak Modai has offered an optimistic assessment of the government’s economic program during the past year and an upbeat preview of the economic climate in 1986. He presented his forecast in a year-end interview published in Yediot Achronot. But his Likud colleague, Minister of Science and Development Gideon Patt, strongly dissented. With the same newspaper as his forum, Patt was sharply critical of the austerity economic policies engineered in large measure by Modai and claimed their perceived success was only arithmetic and psychological. He warned that the inflationary spiral, presently under tight control, may reappear next March and April.

Modai confidently predicted an inflation rate of between 20-30 percent in 1986–compared to the triple digit rate less than a year ago, and saw a monthly rise of the consumer price index not exceeding 1-2 percent. The rate for December, 1985, will probably be just over one percent.

The country has reached an economic cool-down with an inflation rate similar to that of several European countries, Modai said. He said the Treasury intends gradually to eliminate price controls, though it will retain them in such sensitive areas as rents and the prices of fruits and vegetables.

A STABLE SHEKEL IN THE OFFING

Modai held out the promise of “a Shekel as stable as the Dollar,” implying indirectly that rumors that another devaluation is imminent are groundless. The rate of the Shekel will reflect the country’s economic abilities, Modai said. He predicted that its exchange rate will rise much less than the price index and that as long as wages do not rise, there will be no need to raise the Shekel.

Wage negotiations with Histadrut have not yet begun and Modai had little to say about wages except that he thought they would be similar to the 1985 levels. He also said little about unemployment which he saw as a regional problem with higher levels of joblessness in the development areas pushing up the national average. He said the problem of unemployment is being dealt with by a special government committee.

The Finance Minister contended that the government’s economic policy did not cause the recent rash of financial difficulties in various companies, though he admitted that the economic program did not help the companies. He predicted that the slump in the building industry will not get any worse. But he saw little hope for textiles, except as an export industry because the economic program allows for no growth in the domestic market.

OUTLINES A SERIES OF PLANS

Modai stated flatly that if prices rise as a result of the withdrawal of government subsidies, he would encourage competing imports to keep them down. He said the tax burden has shifted from wage earners to the self-employed. He plans income tax reforms which will lower taxes and intends to change the structure of the national insurance plan so it will reflect the recipients’ income.

If taxes go down, they will be balanced by the new trend of having the public pay for previously free government services, Modai said. The new $60 a year education tax is an example.

According to Patt, however, the proposed budget for the next fiscal year is as bad as the current one which he said increased, unemployment, plunged the economy into a deep recession, endangered high-tech industry and investments and decreased exports. Patt charged that instead of using recent economic aid from the U.S. to introduce tax reform, the government raised taxes, imposing an additional burden of $150 on every family. He said this decreased the motivation to pay taxes and improve productivity and encouraged citizens to divert their financial resources into illegal channels.

According to Patt, while the government boasts it will cut $580 million from this year’s budget, the real cut does not exceed $170 million and the difference means more taxes. He said the claimed cuts were nothing more than an “arithmetic exercise.”