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Balking on Air to Israel

March 13, 1985

The House Foreign Affairs Committee wants to start work soon on the annual foreign-aid bill, but as of now there's a big omission in the proposals from the Reagan Administration that it will be considering. No new money for Israel has been recommended--not because the Administration is unsympathetic to the Israeli request for more aid both this year and next, but because top U.S. officials aren't yet satisfied that Israel has done to straighten out that country's economic mess. Before it commits itself to additional aid, the Administration has made clear, it wants to see more rigorous corrective measures taken.

Otherwise, warns W Allen Wallis, the undersecretary of state for economic affairs, the supplemental aid sought for this year and the big increase in aid asked for fiscal 1986 would be largely wasted. Israel's basic problem is that it consumes far more than it produces, with the last three years seeing a rise in consumption of 27% but an increase in output of only 5%. American aid can help cover the gap between what Israel spends and what it receives. But until Israel acts more firmly to bring its expenditures and its living standards more in line with its economic realities, fundamental problems will remain that can only grow worse in time.

Israel has made some progress in recent months to slow its economic decline. Exports have risen, the trade gap has been cut by nearly one-third, some government subsidies have been slashed and some new taxes have been imposed. But in basic areas, Wallis says, much remains to be done. Cabinet approval of budget cuts has not prevented individual government departments from overspending their budgets. Any gap between government receipts and expenditures must, by law, be covered by having the central bank print more money. The major result has been a devasting increase in inflation, with a rate that late last year reached 1,200%. Currently inflation has been seemingly arrested by wage and price controls. But Wallis argues that such an artificial method leaves the underlying problem untouched.

Laws have been proposed, but not yet enacted, to give the treasury powers to prevent overspending by government agencies and to create an independent bank that would not be obliged to print all the money that the government needs to cover its deficits. But even the adoption of these measures would leave some key issues still to be confronted, including over-employment by the government and declining labor productivity. Perhaps most important of of all, as Peter Grose writes in his new book, "A Changing Israel," is that "Israelis have come to expect standards of living and programs of social benefits far above their means, despite the crushing burden of high-technology defense requirements." In short, unless Israelis are prepared to accept greater austerity in fact as well as in name, they have little hope of seeing their economy restored to its once-impressive state of health.

Israel has asked for $800 million in supplemental aid this year, and $1.8 billion in economic assistance next year. Sentiment in Congress seems to favor providing these grants. But in the absence of more sweeping internal economic reforms, would this bolstered influx of dollars do anything more than simply postpone the inevitable time of necessary economic reckoning, and in so doing make the remedies that ultimately must be imposed all the more onerous? This is the real question that Congress ought to be weighing as it prepares to vote on emergency economic help for Israel.

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