Israelis Are Urged to Embrace Austerity as Price of Conflict

JERUSALEM — Although the complete human toll is still unknown, the latest Middle East crisis looks set to hit Israelis squarely in their pocketbooks.

The 19-month-old conflict, which has already devastated the much smaller Palestinian economy, is now propelling Israel toward financial instability, the government of Prime Minister Ariel Sharon said this week as it introduced a package of emergency austerity measures.

Israeli officials have blamed the nation’s economic ills, including a budget deficit of about $2.7 billion, primarily on the latest violence, but other analysts say the conflict is only partly to blame. Several say the government’s budget, passed two months late in February, was bloated from the start.

Nonetheless, “wars cost money and a lot of it,” Finance Minister Silvan Shalom said as he urged Israelis to tighten their belts and support the government’s proposals for spending cuts, tax hikes and salary freezes. Speaking with Israel Radio, Shalom said the nation needs to embark on an economic “Defensive Shield” program, akin to the army’s just-completed West Bank offensive of the same name.

The finance minister said the months-long conflict with the Palestinians is exacting a price well beyond the cost of the army’s military operations and is hurting foreign investment, tourism and many other sectors of Israel’s economy. The government, he said, expects “everyone to understand the importance of this hour and chip in.”

Plans Add to Worries of Many

Yet at Jerusalem’s popular Caffit restaurant, co-owner Irit Altaratz said the proposals only increased her worries about Israel’s deteriorating economic and security situation.

Since a recent failed suicide bombing at her restaurant, Altaratz said, she has been forced to take a number of expensive precautions, from hiring a full-time security guard to installing window bars, surveillance cameras and shatterproof glass.

Last month, she and other local restaurant owners decided to charge each customer an extra shekel, about 20 cents, to help offset the measures. And with few Israelis dining out these days, the government’s proposals, which include a reduction in insurance benefits to employers, will make a tough business climate even tougher.

“As a business owner and a private citizen, it’s really very worrying,” Altaratz said.

The economic plan is expected to be taken up by the Israeli Cabinet on Sunday. If approved, it will be sent to parliament. But anxiety over the proposals already has sent the Israeli currency plummeting to new lows against the dollar and has prompted widespread criticism from business and labor leaders, as well as politicians both within and outside the government.

Many said the program is unlikely to pass, at least in its current form. A poll in Thursday’s Yediot Aharonot newspaper showed that 58% of the public opposed it, as did a majority of lawmakers, including prominent members of Sharon’s own Likud Party.

Incursion Has Cost Hundreds of Millions

But a few Israelis said the government had little choice but to make the recommendations, given the size of the deficit, the ongoing recession and the likelihood of continuing conflict with the Palestinians. In the last month alone, since it launched the West Bank offensive after a wave of devastating suicide bombings in Israel, the army has spent more than $200 million in incursion-related costs, an army spokeswoman said Thursday.

Eitan Robbe, the Finance Ministry’s customs director, defended the plan as fair, saying it divided the new tax burden and spending cuts proportionately among various groups.

“It is a very difficult plan, but it is very fair,” Robbe told Israel Radio.

The plan’s most sweeping--and controversial--elements include calls for an across-the-board wage freeze in both the public and private sectors, cuts in unemployment and government child support payments, and budget reductions of 4% for all government ministries. Salaries for Cabinet ministers and legislators would be cut 5%.

Amir Peretz, who heads the giant Histadrut labor federation, said the proposals amounted to a “declaration of war” on Israel’s workers. Peretz, who also leads a small political party that left the government in February, threatened a general strike if the austerity program, particularly the public-sector wage freeze, is approved.

Histadrut spokesman Avinoam Magen said the federation could not support measures that he said would hurt Israel’s poor and working classes.

“We also cannot agree that the same lower middle class that fights now on the front lines will also be those getting hurt on the home front,” Magen said.

Other constituencies that could be hurt by some of the proposals, including Israel’s Arab citizens and ultra-Orthodox Jews, have also protested. The two groups, whose members often have large families and are less likely than other Israelis to serve in the military, would be most affected by plans to reduce the national child allowance. (The government proposed smaller reductions for families in which one or both parents have served in the military.)

Jafar Farah, director of the Mossawa Center, an advocacy group for Israeli Arabs, called the government’s proposals both shortsighted and racist.

“This would only produce more and more anger and extremism” among Israel’s Arabs, Farah said. “Is that what this government wants from the Arab minority?”

Several Cabinet ministers, including Education Minister Limor Livnat and Transportation Minister Ephraim Sneh, criticized the proposals for cutting too deeply into their budgets.

Business leaders also announced their opposition to much of the plan, saying the proposed tax hikes would increase unemployment, slow the weakened economy still further and drive off remaining foreign investment.

Joseph Shostak, managing director of the Federation of Israeli Chambers of Commerce, applauded Shalom’s plan to cut spending but said the federation strongly opposes any tax increases.

“The Israeli market already has huge taxes,” Shostak said.

The plan calls for new taxes on capital gains from stock sales and on interest earned on savings accounts. Two relatively minor tax increases, on cigarettes and gasoline and diesel fuel, took effect this week but without any significant immediate controversy.

Finance Ministry officials said it is imperative that the plan be passed as quickly as possible.

“We cannot afford to have any more delays,” said Ohad Marani, the ministry’s director general. “We need to adjust the budget right now or face a much bigger budget deficit.”