Move to Curb Inflation: Harsh New Economic Measures Imposed

The government has imposed harsh new economic measures aimed at absorbing some $900 million from the public sector as a means of curbing inflation.

But the double-barreled approach that went into effect last night — a one-time property tax and cuts in subsidies for fuel and certain basic commodities that sent prices soaring — has come under fire from some of the country’s leading economists.

The cut-back on subsidies took effect immediately to avoid hoarding for the High Holidays which begin Wednesday night. The tax, which won final approval by the Cabinet yesterday, will apply to private cars, boats, apartments where the owner is not the resident, business premises and securities. Tax collection methods will be tightened and loopholes closed, according to Finance Minister Yitzhak Modai.

CUTS IN PRICE SUPPORTS

According to some economists, however, the measures will not achieve their objectives unless matched by the $1 billion slash in government spending vowed by the Cabinet last week but apparently not likely to materialize in this fiscal year.

Moreover, the cuts in price supports have the immediate effect of further fueling inflation. And they are selective. Many basics still benefit from full subsidies, making it more difficult for the government to meet its $1 billion savings target.

The price of fuel went up by 30 percent overnight. The prices of other government controlled products rose by 18-55 percent. As a result, economic experts say, inflation now running at an annual rate of over 400 percent is likely to exceed 1,000 percent.

At the same time, the government is continuing to support the price of bread by a subsidy of 134 percent; eggs by 105 percent; milk by 103 percent; and frozen poultry by 97 percent. Even so, long queues developed at supermarkets and gasoline stations yesterday as the public rushed to stock up on food and fuel before the midnight price hike deadline.

SUBSTANTIAL AGREEMENT ON GOALS

The economic program is one of the few areas where the Labor-Likud unity government is in substantial agreement on goals. Premier Shimon Peres told the Knesset today that the gravity of Israel’s economic situation is without precedence. He defended the new taxes against opposition charges that wage earners are being forced to bear most of the burden.

He stressed that the property tax is being levied on a variety of personal assets and cannot be described as a tax on “the poor.” According to Modai, each asset will be taxed at a flat rate of two percent of its value. The value of a car, he explained, would be determined by such factors as size, age and market price.

A MAJOR STUMBLING BLOCK

But if the government is prepared to tighten the public’s belt, it is having difficulty with its own. A major stumbling block at the moment is the Education Ministry’s budget. Modai and Education Minister Yitzhak Navon agreed today to bring their differences before a special ministerial committee, headed by Peres, which would have the final say.

The most serious issue is whether or not to continue free high school education. The Education Ministry has proposed raising social insurance payments by 0.2 percent to fund free high school education or, alternatively, impose an overall education tax.

As for the overall fiscal budget, the various ministers have been unable to agree so far on a cut of more than $650 million, well short of the $1 billion goal. That cut, moreover, will be spread over an entire calendar year. The savings realized in the present fiscal year will amount to no more than $300 million.

Senior economists advising the government maintain that even a $1 billion saving is not enough to set the economy straight. Prof. Michael Bruno and Prof.Eitan Berglass appeared before the Cabinet last week to urge an $800 million cut in government spending and a $1.2 billion cut in subsidies — a total of some $2 billion. They also recommended that the government refrain from imposing new taxes because of their inflationary effects.

But the government has apparently disregarded their advice and has taken a different tack. It has levied new taxes and has shelved indefinitely a wage-price-tax freeze which labor and management appeared only last week on the verge of accepting.

Bruno said in an interview published in Haaretz today: “I believe that eventualy reality will impose on us the demanded cuts. We had an opportunity to cut the budget in a controlled manner. Eventually we will have to do it in an arbitrary manner, either because we shall not receive the funds or because the situation in the economy will dictate the cuts which we recommended.”

In fact, the public may soon take the lead forcing the government to take unpalatable measures. Until now, Israelis have been living well. Cost-of-living increments linked to the rising price index have been a cushion against inflation. But this is fast being eroded. The C.O.L. increment due on September salaries, payable October I, will be 13.2 percent. It is estimated, however that wages will decrease in value by about 10 percent in the next few months because of the sharp rise in the cost of basics.

By American and West European standards, Israeli prices are a bargain. A loaf of ordinary bread costs 10 cents. A liter of milk is 30 cents. An egg costs seven cents. A kilo of meat sells for $5.25 and a gallon of premium gasoline is $2.50. But the average Israeli family must now spend $500 a month to cover its basic needs, according to the Central Bureau of Statistics.

The new taxes will reduce spendable income. The Treasury expects to take in about $150 million from improved income tax collections; $400 million from the one-time levy on private cars, boats and aircraft, securities and business construction; and $350 from reduced subsidies. Living standards inevitably will decline.