Israeli economic choice: fight 130% inflation or pay off national debt

Israel's economy is looking a lot like many people's fall wardrobes -- to long (on government grants) or too short (on money to pay for overseas purchases).

And this isn't wearing very well with the Israelis.

"The question is what to fight first," observed David Neumann, whose disclosures of the monthly jump in the consumer price index (CPI) are eagerly awaited here.

"We can try to reduce our $20 billion national debt, which has been increasing at the rate of $4 billion a year, or we can seek palliatives for our soaring inflation by granting compensatory cost-of-living increments."

Mr. Neumann spoke just after having announced the monthly CPI rise of 6.1 percent. That was a comparatively modest increase, but translated into an annual percentage it means that Israel's inflation will jump from its present 130 percent to 200 percent by the end of the year.

Since the built-in cost-of-living increase is what enables the Israeli wage earner to cope and since government policy, under the Labor Party as well as the incumbent Likud coalition, has been to make inflation painless, paychecks will be 12 percent bigger in October.

Economics and some politicians are aware of the long-range implications. On the one hand, they shudder to think of this country falling into the same category as Turkey or Poland as far as the size of its national debt is concerned.

Israel is even deeper in the red if its relatively small population is taken into account.

Some of the recent strain in US-Israeli relations already is being attributed to the fact that Israel is a debtor nation and the US is one of its principal creditors.

It is common to blame the billion-dollar gap between exports and imports on the forfeiture of the Sinai Peninsula's oil fields or on the heavy drain of military outlays. But neither provides a valid apology: When Israel pumped Sinai oil (from 1967 to 1978), it paid royalties to an Italian consortium, and arms expenditures account for only half the deficit.

The balance-of-payments deficit for the first quarter of 1981 was $911 million, a figure that reflects $2.659 billion in total exports of goods and services compared to $3.570 billion in imports of same.

During this period, direct defense imports (including military aircraft such as the F-16, purchased in the US) accounted for $541 million.

Difficulties in Israel's main markets -- Western Europe, where economic activity has been crimped by unemployment -- and rising costs of raw materials for the nation's industries are cited as serious impediments to recovery.

The inflationary spiral is further accelerated by such unavoidable steps as the increase in fuel oil prices, which in turn forces the cost of electricity and of water for irrigation (powered by electrical pumps) to go up.

Israeli economists have yet to explain how their antional treasury could afford to reduce the taxes on popular consumer goods, such as color television sets, small automobiles, and household appliances on the eve of the recent general election, thereby forfeint revenue and generating an unprecedented spending spree.

Naturally, imports of the affected items soared, as did the requisite foreign currency allocation.

There are some brighter spots in the otherwise somber Israeli economic picture, however.

In the first seven months of this year, exports wree up slightly compared with the same period in 1980: $3.119 billion vs. $3.113 billion. And this gain was achieved despite a steep drop in overseas sales of Israel's biggest item: cut diamonds.

The most outstanding advance was made by the impressive electronics and metals manufacturers: 29 percent more exports of their products than last year. Exports of printed paper materials (including books), rose 18 percent. Processed foods and agricultural produce were up 12 percent.

It boils down to this axiom for Israel and probably the rest of the world, too: Politics and economics are inseparable.