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Netanyahu’s Austerity Plan Comes Under Fire From Labor Groups

JERUSALEM — Finance Minister Benjamin Netanyahu maintains that Israel is teetering on the edge of an economic abyss and desperately needs an emergency rescue plan.

His critics counter that his proposed cure, a stiff austerity package mixed with hefty doses of tax-cutting and privatization, is worse than the illness and will ultimately plunge the country into social mayhem.

If a deal does not emerge from the feverish negotiations now going on between the government, which has adopted Netanyahu’s budget cut proposals, and the Histadrut labor federation, which has vowed to resist at all costs, the standoff is likely to escalate into an all-out general strike that could paralyze the entire country as early as next week.

In one sense this is good news. The very fact that such a strike is even being contemplated, while the war in Iraq continues, is a clear sign of the public’s growing confidence in the low likelihood of Israel being attacked. After surviving for two weeks without a clear-cut victory — and increasingly convinced that Saddam Hussein lacks the ability to lob missiles at Tel Aviv — the Israeli public is slowly returning to business as usual. Right now, that means an intense domestic debate over economic policy is gradually taking center stage.

Netanyahu claims that since he reluctantly accepted the Treasury portfolio in Ariel Sharon’s new government a month ago, he has been horrified to learn just how empty the nation’s coffers really are. He and his allies blame the crisis on years of bloated budgets and social spending, though his critics note that Israel nonetheless was experiencing dramatic growth until the outbreak of the intifada two and a half years ago.

Netanyahu’s doomsday warnings of looming national bankruptcy helped persuade 21 of the cabinet’s 23 ministers to vote for his austerity plan, but he will have a much tougher time persuading the Knesset, not to mention the public itself. In a poll published by the daily Ma’ariv last week, only 22% of the public supported Netanyahu’s plan, while 55% opposed it.

Netanyahu is seeking to slash the $56 billion state budget by $2.35 billion, on top of a $2 billion cut approved by the outgoing government late last year. Netanyahu claims that without such cuts, Israel will lose its credit rating abroad, and will probably forfeit most of the $9 billion in loan guarantees recently approved by the Bush administration. Israel’s situation is so bad, Netanyahu’s aides say, that the Treasury has quietly stopped seeking loans abroad, for fear it will be refused.

Aiming to reduce what he describes as a bloated public sector, and to stimulate the sluggish private sector, Netanyahu has presented an emergency budget that includes a 10% across-the-board cut in government expenditures, a hefty 8% average cut in public-sector salaries, reduced social benefits and layoffs of thousands of government employees, including 6,000 teachers. At the same time, Netanyahu aims to stimulate the economy by cutting income tax rates, luring foreign investments, privatizing government-owned companies and investing in massive infrastructure projects.

But while Netanyahu depicts his plan as a necessary if painful operation, his detractors claim the emergency surgery will do far more harm than good. The Histadrut and a host of similar-minded lobbies and groups accuse Netanyahu of striving to introduce a “Thatcherite” economy in Israel that would wipe out whatever remains of the vaunted welfare state established by Israel’s founders.

The critics claim — and an overwhelming majority of the public agrees — that Netanyahu’s plan would accelerate the trend toward growing inequality between extremes of rich and poor in recent years. Laying off thousands of public sector employees would increase already spiraling unemployment figures, now hovering at 12%, while the drastic reduction in government entitlements and subsidies would plunge hundreds of thousands of Israelis below the poverty line. The detractors cite similar budget cuts enacted during the previous Sharon government, which failed to revive the economy and may have deepened the widespread recession.

Netanyahu believes the economy can be jump-started only by stimulating business entrepreneurs and encouraging highly-paid executives. His critics claim the growing inequality in Israeli society poses no less mortal a danger than the economic morass. They say Netanyahu’s plan risks igniting widespread unrest that could literally set the house on fire.

Netanyahu concedes that the Palestinian intifada is largely responsible for debilitating the Israeli economy, but he harbors no real hopes for any positive change in the situation during the next few years. In the meantime, he is pressing for a series of steps to reduce the pressure and allow for some recovery. For one, he is pushing for rapid completion of the so-called separation fence now under construction in the West Bank as a physical tool to decrease the level of terrorism, thus restoring some stability to Israel’s economic environment.

He is also banking on the American campaign in Iraq to change the regional calculus. The finance minister says he hopes that a clear-cut American victory will lead to a general revival in the world economy, and he expects some of the recovery to rub off on Israel. In private conversations, he and some other senior figures even allow themselves bouts of fantasy about reopening the old oil pipeline between the Iraqi oilfields in Kirkuk and the oil refineries in the port city of Haifa, last operated by the British mandatory authorities in pre-independence Palestine.

Other government ministers — notably including Sharon himself — harbor doubts. They believe that only a resumption of the Israeli-Palestinian peace process can bring significant economic change. Sharon’s problem is that he wants the diplomatic process to resume on Israeli terms, with American collaboration.

That American support seemed a sure bet just a few weeks ago, on the eve of the Iraq war. Jerusalem expected that after a quick victory, Washington would look to pay back those that opposed it on Iraq by shutting them out of the Middle East peace process. However, as the war progresses and the Americans appear to be getting embroiled in much more than they bargained for, there are increasing jitters here that Washington will opt to woo back its old allies, potentially at Israel’s expense.

Sharon may thus find himself, after the war is over, stuck between a rock and a hard place, forced to choose between accepting a peace plan he does not support or risking a costly confrontation with the United States that he cannot afford. Any hopes of economic recovery would necessarily be dashed by political friction between a balking Jerusalem and its indispensable ally, Washington.

Even if the post-war American initiative proves to be more palatable to Sharon than currently feared, it is highly unlikely that Sharon’s right-wing coalition partners will go along. His salvation will come from the Labor Party, which is once again signaling a willingness to enter Sharon’s coalition.

Perhaps to prepare the ground, Labor has avoided taking the lead in the public campaign against Netanyahu’s austerity plan. Some say this is due to the fact that if, as a result of diplomatic movement, a Likud-Labor unity government is reconstituted, Netanyahu is the most likely candidate to pay the ultimate price and find himself out of a job.

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