Forecast of Economic Situation

Regardless of which party wins in the July 23 Knesset elections, Israelis will face drastic cuts in government spending and possibly “limited unemployment” but they will benefit from a lighter tax burden and a lower rate of inflation, according to Nissim Baruch, Director General of the Finance Ministry.

Baruch, who was Premier Yitzhak Shamir’s economic advisor before he took over the top Treasury post two weeks ago, told a delegation of Israel Bond leaders here that plans are in place to wage all-out war on inflation currently running at an annual rate of 400 percent.

He said that after the elections there would be a “restructuring” of the way the government finances its operations. At present, the government takes 51 percent of the national income in taxes and returns 27 percent in transfer payments, such as subsidies for basic commodities and fuel. This leaves a net tax burden of 24 percent. Planned reforms will reduce both taxes and subsidies.

There might be some unemployment, Baruch said. But inflation will be reduced by financing the budget through loans, the sale of government property and taxes while avoiding entirely the printing of new money.

The major aim of the Treasury is to preserve the real value of wages because any drop in living standards ultimately would harm the economy by prompting well trained, highly qualified manpower to leave the country, Baruch said.

“We are a free country with open borders. Highly trained labor can be returned only by high wages,” the Treasury chief said. He attributed the slowdown in the country’s growth rate to the dearth of immigration, just as earlier high growth rates were linked to a steady aliya.

To attract immigrants to Israel, high living standards must be maintained and that is another compelling reason why salaries must not be allowed to fall in real terms, Baruch said.