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Israel’s New Economic Package Comes Under Fire for Being Arbitrary Rather Than a Thought-out Policy

May 21, 1985
See Original Daily Bulletin From This Date

The government’s new economic austerity package announced late last night, came under sharp criticism today. Economic pundits said it was an arbitrary selection among available options and not a well thought-out economic policy.

Some members of the Likud Knesset faction accused the Labor-Likud coalition government which produced the package of leaning too heavily on taxpayers instead of finding ways to cut government costs.

The package contains more than 20 items, many of which will have to clear legislative hurdles in the Knesset. They represent, more or less, the austerity concepts of Finance Minister Yitzhak Modai (Likud-Liberal) who was strongly backed by Laborite Premier Shimon Peres.

As the package took shape in the course of a grueling, acrimonious 12-hour Cabinet debate, it became clear that the government has indeed opted for further revenue raising and currency conservation measures rather than new, drastic spending cuts. The reason is easily apparent.

While many of the new measures are bound to anger various segments of the public, they were considered preferable to large scale unemployment, the inevitable result of reduced government expenditures. The government and its multitude of agencies is one of the country’s largest employers.

According to government spokesmen, the package was designed to achieve three aims: increase the government’s revenue; save foreign currency; and to cool or slow down the economy which, eventually, should curb inflation. It was the unexpected 19.4 percent ursurge in the April consumer price index that triggered yesterday’s Cabinet action.


The most fiercely controversial and unpopular of the new measures is the 100 percent rise in the travel head tax. It was doubled from $150 to $300 for every person travelling abroad — plus 20 percent of the air fare to their destination.

At the same time, the foreign currency allowance for overseas travellers was reduced from $1,000 to $800 per person. These measures will remain in effect until September 15, the end of the vacation travel season.

The Finance Ministry said the higher travel tax was urgently needed to discourage overseas travel which entails the expenditure of foreign currency. Those Israelis who pay the tax will be contributing substantially to government revenues, the ministry noted. Peres and Modai, in fact, wanted the travel tax upped to $500 per capita.

Warned at one point that Israelis living abroad may renounce their citizenship because it would become too expensive to return home for visits, Peres reportedly retorted angrily, “If that’s all their passport is worth to them they can go to hell.”

An income producing measure which will affect thousands of poorer families is the steep rise in rents at the government housing projects, Amidar and Amigoor. Hitherto, the rents were kept at artificially low levels.

Additional revenue will come from a two percent rise in the Value Added Tax (VAT) — from 15 to 17 percent. The idea behind this is to stimulate exports by curbing local demand. The same purpose motivated the increased sales tax imposed on 58 “luxury” items, many of them imports.


The government will reduce its expenditures by slashing its subsidies on fuel, public transportation and basic foodstuffs. This should save the Treasury substantial sums but the immediate effect will be to increase inflation. New prices will be announced at the end of this month for petrol, milk, bread, meat and other consumer items. They are expected to go up by 30-40 percent and even higher in the case of public transportation.

To cool the economy, the government imposed a three-month freeze on all new government contracts and a partial freeze of government credits. There are to be no wage hikes in the public sector over that period, apart from the regular cost-of-living increments. Modai stressed to reporters today that the government-Histadrut-employers package deal currently in effect would not be changed. The subsidy cuts are within the framework of the package, he said.

Apart from subsidized items, the prices of all other products will increase by an average of 20 percent before the end of the month, economic analysts said.


There were some positive aspects to the new program. The government will reduce the income tax of workers and employers in export-oriented industries by 10 and five percent respectively. Modai conceded that the reductions were minimal but called them “a signpost for the future.”

Finally, the Cabinet approved a measure that would forbid the Bank of Israel, the country’s central bank, from lending money to the Treasury. This means the Treasury will not be able to print new Shekels, a device it has resorted to for the past year simply to pay the government’s bills. But this restriction will become effective only gradually over a three year period.

Such a measure had long been demanded by the U.S. government as a way to restrain Israel government spending. But economic commentators complained today that the three-year period for full implementation is much too long.


Some ministers, Labor and Likud, had reportedly urged a far bolder approach–massive devaluation of the Shekel (which now stands at over 1,000 to $1), dismantling of the linkage system which ties all wages to inflation, and a stiff tax on self-employed persons and corporations.

Energy Minister Moshe Shahal told reporters he had urged the government to increase its income from taxes but to ease the burden on wage-earners. He said self-employed persons and corporations paid little or no taxes which was unfair.

Shahal, one of the country’s leading private lawyers before joining the Cabinet, admitted to reporters that he had been earning between $200,000-$400,000 a year.

Although Peres and Modai rejected more drastic measures proposed by some ministers on grounds they would lead to massive unemployment, the government agreed to discipline itself. There will be a freeze on civil service hiring and a study will be undertaken on the feasibility of reducing the civil service work week to five instead of six days, with wages lowered commensurately.

The government finally imposed severe restrictions on overseas travel by ministers, other officials and civil servants. They may not travel abroad for conferences or advanced studies and in other cases, special approval will be required.

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