News Analysis: Israels consumer-crazed economy starting to falter

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JERUSALEM — The Land of Milk and Honey has become the Land of Cellular Phones, Subarus and VCRs.

But there are clouds on Israel's bright economic horizon, and the next prime minister will have to help the country weather them.

Until recently, Israelis tended to believe that despite the growing deficit in the country's balance of payments, the country was on the right economic track.

During the past five years, the economy grew at an impressive annual rate of 6 percent, unemployment shrank to about the same rate and inflation appeared to be approaching the levels found in many European countries.

Government budgets were directed toward infrastructure, transportation and communications projects, and were aimed at promoting private investment.

In recent speeches, Prime Minister Shimon Peres, touting the dividends of the peace process, said Israel is spending as much on education as on its defense needs — after decades of huge defense budgets.

The Israel of the peace era has become a magnet for foreign investors such as the Santa Clara-based Intel Corp., which is building a huge production plant in the south.

Public consumption has boomed: Israelis have more Japanese cars, drive on superhighways, travel abroad more often and use cell phones almost as much as credit cards at Tower Records.

But as the elections approached, there were increasing signs that the economy was facing potential troubles.

During the first four months of 1996, for example, the inflation rate jumped from last year's 8 percent annual rate to more than 13 percent.

In an attempt to rein in inflation, the Bank of Israel announced Monday that it was raising the interest rate it was charging commercial banks to 15.5 percent from 14.8 percent.

Two of Israel's leading banks, Bank Leumi and Bank Hapoalim, in turn, announced that they would raise their lending rates to consumers to 17 percent from 16.3 percent.

There were other signs of a troubled economy: The Bank of Israel recently devalued the shekel in the face of a climbing trade deficit, which has reached a rate of $1 billion per month.

In addition, government spending exceeded the approved budget by 20 percent as a result of granting large wage hikes to public-sector employees.

During the past few weeks, the government also pumped some $150 million into public health funds.

Critics charged that the government took these moves to secure the votes of the grateful recipients of the largesse.

The rise in consumer spending is also clouding the economic picture.

The shopping malls are full, the rate of personal savings is declining. Every available shekel is being spent for fear that tomorrow one may need more shekels to buy the same product.

As a result of this attitude, consumer fears about inflation become a self-fulfilling prophecy.

An additional pressure on the public coffers recently came from Israeli workers demanding better pension programs.

The immediate expense of meeting their demands has been estimated at $300 million.

The signs keep mounting that there will be a high bill to pay for all the country's expenditures — recalling the go-go, spend-crazy years of the 1980s in the United States.

The Israeli daily Yediot Achronot, commenting in an editorial this week on the Bank of Israel's decision to raise interest rates, said, "This is a blunt declaration to the next government" that it will have to "institute and carry out a comprehensive economic policy."

Financial experts believe that this policy will have to include severe cuts in the national budget.

"Budget cuts will entail a drop in the interest rate, a devaluation of the shekel, more exports and fewer imports," said David Lev-Hari, a professor at Hebrew University.

Other austerity measures that are being called for include a 3 percent cut in the number of civil service workers, lower pay for employees in the public sector, an increase in the value-added tax and an acceleration of the process of privatizing government-run businesses.

The prescriptions for economic health are as well-known as they are potentially painful.

It remains to be seen whether the new government will move quickly to turn them into political realities.

"Past experience has shown that governments tend to take drastic measures only in crisis situations," said Lev-Hari. "It seems that we are approaching such a situation in giant steps."