FOCUS - Analysts say Israel budget cuts overdue

[Reuter / Tova Cohen]

TEL AVIV, July 8 (Reuter) - The Israeli government's 1997
budget cuts may be painful, especially to the middle class, but
analysts said they were necessary to lower 15 percent annual
inflation -- and long overdue.
Late on Sunday the cabinet approved slicing 4.9 billion
shekels ($1.5 billion) from next year's budget, bringing total
spending in 1997 to 170 billion shekels ($53 billion).
The proposal -- which cuts defence and education spending
while lowering subsidies for health and capital investment --
was pushed by Prime Minister Benjamin ``Bibi'' Netanyahu, who has
made economic reform a cornerstone of his new government.
In office only three weeks, Netanyahu shoved the cuts
through so he could take at least one victory with him to
Washington during his official visit this week.
Netanyahu, who departs later on Monday, is eager to woo
foreign investors who have lowered their profile waiting for him
to act on Middle East peace. He said his economic message was
for Wall Street, not Washington.
``My message is that in Israel it is worthwhile investing,
not because we give subsidies but because we have a wonderful
nation, with talents, with technicians and engineers,'' he told
reporters on Sunday night.
Analysts said the muscles Netanyahu had flexed so far bode
well for the fate of the budget programme, which must still be
approved by parliament before year's end.
``Every year we have horse-trading but Bibi has shown himself
to be in control,'' said Jonathan Katz, senior economist at
Capital Holdings consultants.
``There may be some tradeoffs (in the cuts) but I doubt it
will lead to major changes,'' he added.
Nehemia Strasler, economics editor at the newspaper Haaretz,
said the budget cuts would not hurt lower-income Israelis but
would affect the middle and upper classes, through a reduction
in child allowances and higher health and transportation costs.
``This is a blow dictated by reality,'' Strasler said,
referring to high inflation and a current account deficit in the
balance of payments nearing $5 billion.
``If there was no cut, the economy in a year or two would
reach a true crisis that would require far more drastic steps
which would lead us to a recession,'' he wrote in Haaretz.
Netanyahu said he inherited a sick economy from the
Labour-led government he defeated in May.
``If we had not done what we are doing the economy could have
quickly come to a state in which we would have lost control of
it, prices would have risen for everyone at an uncontrollable
pace,'' he said in an interview on Army Radio.
Israeli markets hope that by lowering inflation, the cuts
will enable the central bank to loosen up on monetary policy.
Last month the central bank raised its key lending rate by a
steep 1.5 percentage points to an annual 17 percent.
Higher interest rates have plagued the stock market as
investors have transferred money from the market to
high-yielding fixed income investments.
Analysts said it would be a while before interest rates
fall, even with the budget cuts.
``I don't think in the near term the central bank will lower
interest rates because they have tried that sort of zigzagging
in 1995. The bank will be much more cautious,'' Katz said.
The stock market opened barely changed on Monday, following
news of the budget programme.
``Investors are digesting the news...and it is not yet clear
what its implications are,'' said Michael Weiss, head of research
at Evergreen Capital Markets.