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Austerity Budget Sparks Bitter Debate

December 16, 1975
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The Cabinet began yesterday what is expected to be a prolonged and bitter debate over the IL 84.2 billion austerity budget submitted by Finance Minister Yehoshua Rabinowitz for the next fiscal year. The draft budget, strongly backed by Premier Yitzhak Rabin and the Bank of Israel which helped to shape it, represents the beginning of a 3-4-year effort to put Israel’s severely strained economy in order by drastic cuts in government expenditures and, hopefully, substantial increases in income from taxes and an invigorated export industry.

Already dubbed the New Economic Program (NEP), the budget would demand major sacrifices from the public in the form of higher prices, new taxes, reduced services, lower living standards and, most painful of all, a sharp increase in unemployment. The Treasury’s economic planning authority concedes that unemployment would scar to about 60,000 next year compared to 37,000 this year if the new budget is adopted.

This would mean that one out of 20 Israelis would be jobless next year and the unemployment rate would rise to 64,000 in 1977. In 1978, the Treasury predicts, the unemployment rate would begin a slow decline, leveling off at about 56,000 that year.


The proposed budget, challenged at the outset by various Cabinet members whose ministries would be affected by the reduced spending, was bitterly attacked today by Histadrut which charged that the heaviest burden would fall on wage earners.

The budget evoked unhappy memories of Israel’s economic stagnation of the mid-60s which was reversed only by the outbreak of the Six-Day War in 1967. Some economists say the Treasury is over-estimating the increased income from taxes and other sources and was too optimistic about the beneficial results of the austerity program.

The new budget exceeds the current one by IL 21 billion, but in real terms is actually five percent lower because of inflation. It reflects Israel’s immense defense burdens. Of the proposed IL 84.2 billion, IL 25.25 billion is ear-marked for defense. The Education Ministry would get IL 3.16 billion and the Health Ministry IL 1 billion. The budgets of all other ministries would fall below the IL 1 billion mark.


The Treasury hopes to cushion the impact of unemployment by transferring about 100,000 workers from public service to productive industries over the next four years and by introducing new incentives for foreign investors who, presumably, would create new jobs.

It hopes to add to the government’s income by imposing the long projected five percent added value tax, tightening up on tax collection procedures and auditing “cash transactions,” a common form of tax evasion. Export intensive industries would be granted tax exemptions and would be protected from the periodic devaluation of the Pound. The same inducements would apply to foreign investors.

The government would drastically reduce its subsidies for basic food products and public transportation which have kept prices in those areas more or less stable up to now. The price of bread, for example, could be expected to go up by more than 60 percent. Israelis would pay more for fuel water and electricity.


In addition, road construction would come to a virtual halt as would the construction of public buildings. The waiting period for new telephones, already as long as three years in some areas, would be lengthened even more. Although the government promises no more major devaluations of the Pound, the so-called “creeping devaluation”–a 1-2 percent depreciation every 30 days–would continue. The Pound, which now stands at 7.1 to $1, would decline to IL 10 to $1 by the end of 1976.

The new budget would eliminate State financing for ninth grade education. Education Minister Aharon Yadlin said at yesterday’s Cabinet meeting that his ministry could not function under the proposed allotments even though they exceed the budgets of all other ministries except defense. He warned that education in Israel would deteriorate seriously.

Health Minister Victor Shemtov told reporters last night that while he supported any move to keep the lid on spending, it was a grave error to slash government supported health services because “people’s lives are affected and ultimately this hits at the nation’s security.” Housing Minister Avraham Ofer warned of wholesale unemployment in the housing industry and a serious slowdown in home building.

Even the reduced budget would leave Israel with an IL 3.5 billion deficit next year, but that would be an improvement over this year’s IL 5 billion deficit. While every Cabinet minister is expected to put up a last ditch fight for his budget needs, the Cabinet as a whole realizes that without compromise the national budget would exceed IL 100 billion which the government simply cannot afford. Nevertheless, hard bargaining is expected during the months ahead.


The government announced, meanwhile, measures to limit profits on State bonds linked to the cost-of-living index. The reduction will be carried out gradually until the c.o.l. linkage will be only 70 percent of the face value of the bonds. Only bonds issued as of yesterday will be affected. Public institutions and pension funds that invest in government bonds are exempt from the cut. The government also announced a 1.5 percent sales tax on bond transactions, a move aimed at speculators. No tax will be imposed on the redemption of the bonds when they mature.

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