Secretary of State George P. Shultz has warned Israel that a substantial increase in U.S. aid depends on the implementation of a much more extensive economic reform and austerity program than has been enacted here so far, Prime Minister Shimon Peres disclosed today.
Addressing a convention of Israeli government statisticians, Peres said Shultz warned Israel that "if you don't do more, and more quickly, you will face serious and urgent economic problems."
Peres, referring to the Shultz message, said the question of an increase in U.S. aid "is in our hands."
"We have made economic mistakes, and we must now correct them," he said. "But not at an unbearable cost."
"No one is proposing starvation and austerity," he said.
But Finance Ministry officials said economic reforms suggested by Shultz could lead to a sharp increase in unemployment, which recently climbed to 7.1 percent of the work force for a 19-year high.
Other officials said the U.S. interference in Israel's economic affairs was unprecedented but perhaps understandable in light of the fiscal deterioration and sharply increased dependence on U.S. assistance.
The reasons for Shultz's skepticism about Israel's economic recovery program include a clear reluctance by the Cabinet to cut deeply into the government budget of about $22 billion a year. The new Cabinet, shortly after taking power in September, announced its intention to cut the budget by about $1.3 billion. Exact figures are not available, but it is estimated that actual cuts implemented thus far total less than $300 million.
Peres' national unity government has also imposed a three-month wage and price freeze in an attempt to stem inflation, which in October reached an annual level of 1,260 percent.
However, it has taken no steps advocated by Shultz and economists both here and in the United States to reform some of the underlying structural features of the Israeli economy, including an elaborate indexing system that grants automatic cost-of-living pay raises tied to the inflation rate and large-scale government subsidies for basic commodities such as food and gasoline.
One result of the economic structure is that the wage and price freeze is working at cross-purposes with attempts to cut the budget. For example, as the cost of raw materials has risen, the price freeze at the consumer level has meant effectively higher levels of government subsidies for many commodities.
Peres reportedly received the message in a letter from Shultz about two weeks ago, before Israel formally asked the United States for a record amount of economic and military aid totaling almost $5 billion over the next 18 months. The text of the letter was not made public.
The Israeli request included a special allocation of $800 million during the current fiscal year, in addition to the regular $2.6 billion in economic and military assistance that Congress appropriated for the year.
The Israelis also are seeking a huge increase in aid for fiscal 1986 totaling $4.1 billion.
Last week, the Reagan administration signaled its dissatisfaction with the domestic Israeli economic program by publicly announcing that the request for the $800 million supplemental appropriation for this year was being deferred "pending the adoption of an effective Israeli economic stabilization program and a determination of the utility of such U.S. assistance in supporting such a program."
The regular aid program for Israel for the next fiscal year will be submitted to Congress as part of President Reagan's budget proposals next month.
While the administration has been openly skeptical of the effectiveness of economic measures taken here by the Peres government, supporters of Israel in Congress are expected to mount a concerted effort to win approval of the supplemental appropriation and the proposed record rise in aid next year. It is not known whether the administration will oppose such moves in Congress.
Israeli officials said Shultz's message detailed the austerity policies he would like to see implemented, including deep cuts in official spending, limitations on the government's authority to print money and cutting state support for unprofitable industries, Reuter reported.
Disclosure of the Shultz letter and its implicit threat regarding levels of U.S. aid may help Peres win more austerity measures from a reluctant Israeli Cabinet. The theme that Israel itself must act to overcome its current economic malaise -- which includes inflation expected to reach 500 percent this year, a growing national debt and a widening balance of payments deficit -- has been invoked frequently by Peres since he took office as prime minister in September.