Israel's soaring inflation rate, which exceeded 1,000 percent last year, will plummet to 70 or 80 percent over the next 12 months, according to Finance Minister Yitzhak Modai.
If this goal is achieved, Modai said, it will be regarded worldwide as "phenomenal."
The government's emergency economic recovery program, Modai said in an interview, will bring the inflation rate for August down to 3 percent or less, compared with 27.5 percent for July. Thereafter, Israel should be able to sustain a 3 percent monthly rise in the cost of living index, the finance minister said, eliminating the need for further supplemental grants of U.S. aid.
Modai said his optimistic forecast was based on a study of economic models that have proved reliable in the past. If they prove to be wrong, he said, "either you throw me away, or throw the models away."
Meeting with several correspondents before a visit to Washington next week in which he will brief Secretary of State George P. Shultz on the progress of Israel's austerity campaign, Modai said, "If we stand firm, as I intend to, I'm quite confident we will proceed to reach a situation where not only will we not need any supplemental aid, but in which the regular aid will be put into growth and diminish the need in the future for the same level of aid."
The U.S. Congress earlier this month approved $1.5 billion in supplemental aid for fiscal year 1985-86 to bolster the $2.6 billion military and economic assistance package.
Modai said the greatest impetus to reducing monthly inflation to 3 percent has been a sharp reduction in Israelis' spendable income, resulting from the austerity program adopted July 1 in an effort to jolt the economy back to health. The program included devaluation of the shekel; a three-month general wage and price freeze; price increases of 17 to 82 percent on subsidized products such as gasoline, bread and milk, and higher payments for transportation, telephone, education and municipal services.
The government also sought to reduce purchasing power by eliminating methods that Israelis traditionally use to protect themselves from inflation, such as breaking the link between wages and the cost-of-living index and restricting deposits to bank accounts linked to the U.S. dollar.
Modai described last month's 27.5 percent inflation rise as an anomaly, attributing it to the rise in prices of subsidized goods, and he denied suggestions that prices will generally rise in October, when the three-month freeze ends.
The October inflation rate will be held down, he said, by reduced labor costs resulting from agreements with the Histadrut labor federation that are effective until March; declining interest rates; reduced purchasing power stemming from the separation of salaries from the cost of living, and a steadying of the cost of imported raw materials because of a fixed rate of currency exchange.
The problem, Modai said, will be to avoid slipping into a recession, with its accompanying unemployment. But, he said, recession can be more easily avoided here than elsewhere because exports comprise 50 percent of Israel's total production, and even a slight increase in exports can offset a squeeze in the domestic market.
When asked whether he anticipated more economic controls, Modai replied, "I think what we should do is implement what we have decided . . . . The main thrust is to reduce the amount of shekels in the hands of the people."
He added, "You can't control the economy forever by administrative measures. They tried it in the United States [in 1973], didn't they? Shultz himself thought that he could control prices forever. Ridiculous. He controlled it for six months and then ran away from it like it was fire. He had to hand it back.
"We took it upon ourselves to control [the economy] for a transition period. From then on, either the market forces have the muscle or not. If they don't have, then something is basically wrong with our economy or with our people," Modai said.
The finance minister said he had detected no signs of impatience in the Reagan administration over the austerity measures adopted July 1. "All we get is words of appreciation," Modai said. He said he had given Washington assurances that the $1.5 billion in supplemental aid will not be used to offset deficits, but will be applied to the foreign currency reserves, which have dropped to $2 billion.
"We ourselves realize that Israel must come to a situation where we could manage our economic affairs with regular aid, and not ask for supplemental aid," Modai said.
"We have no right to put such a burden on the American people."