38 days into office, Mr. Peres outlined to the House the domestic economic and foreign policy initiatives of his government. At the top of the national agenda was the economy, with an inflation rate of over 400%. It was evident that the economy could not be dealt with effectively unless there were an improved regional climate, a peace process which would help Israel's standing in the United States and facilitate additional economic aid. He discussed his recent visit to Washington (7-13 October) found much good will and readiness on the part of the president to help Israel. At the conclusion of his 9 October meeting with President Reagan, Mr. Peres said that "I found in the White House a true friend of Israel who understands our problems and dilemmas". In his talks with Defense Secretary Weinberger, Mr. Peres stressed the need to improve the quality of the I.D.F. rather than its size. Text:
Mr. Speaker, members of the Knesset, I thank the Speaker of the Knesset for his kind words; I wish to say to the members of this house that the government will gladly cooperate with the Knesset and will be scrupulous in the maintenance of proper and honorable parliamentary life.
I have come to inform this house that from now on, the government will concentrate on two central issues: Checking inflation, and renewing the growth of the economy. Checking inflation will require us to tighten our belts, to exercise restraint, to cut down, to abstain, to work more and produce more. And the more completely we do this at a quickening pace, the shorter will be the difficult transition period which awaits our society.
Renewing economic growth will require both mobilizing outside means and calling on our own resources, moving from services to production and changing the structure of the economy.
The meaning of all this is a greater burden and, at the same time, greater hope.
The national unity government began its work 38 days ago. It does not agree on everything, but it does agree that there is a need to reunite the nation, to revive the economy, to secure the Galilee and to vacate Lebanon, to bolster security and rescue the peace process in the region.
The formation of such a government is not yet a solution to any of these problems. A broad-based government creates a better opportunity to contend with the difficult problems; but it does not spare us having to endure the struggle itself. The very establishment of this government has lightened somewhat the burden of the national debate, freed it of its excessive character, which bordered on fraternal hatred, and made it possible to begin dealing with the economic issue, the Lebanese problem, the procurement program, and a renewed call for peace.
But the brunt of the problems are still before us, not behind us. When this government was established, the economy was already at the height of an economic spiral. It was afflicted with a series of ills whose cure requires contradictory measures. The evident inflation had already reached more than 400%, and had brought in its wake a latent inflation of hundreds more percentage points. The deficit in the balance of payments had reached $5 billion, and our external debt came to $23 billion. Repayment of principal and interest was already consuming half the national budget. Our foreign currency reserves had dwindled to a danger point. Unemployment had begun to spread, the service sector had grown, growth had halted, and consumption had risen.
There is no one solution to all these grave problems. On the contrary, the attempt to cure one ill only aggravates another. Lowering inflation is liable to increase unemployment; reducing the deficit could accelerate inflation. Quite a number of economies the world over have been struck by this multiple disease of inflation, unemployment, and paralysis known as stagnation and they found no easy or swift remedy for it.
Our economic program is based on four fundamental components to reduce public and private consumption; to increase foreign currency intake and prevent its wastage; to take steps to check inflation; and to renew the growth momentum of the economy.
There is a consensus on these fundamental lines. The methods of execution require careful planning and detailed decisions as to the order in which the principles should be implemented, the speed with which they should be put into operation, and the way they should be executed - whether by national consensus following negotiation, or also by legislation.
The cabinet decided, at its first meeting, to take the first step - reducing public consumption by cutting $1 billion over the next 12 months. The state budget - $22.6 billion - appears large on paper, but in fact, only half of it is available for cutting, since the other half is slated for repayment of debts and interest. Even in the remaining $11.6 billion, $1.5 billion are actually for subsidies on exports and basic commodities. Striking at the export subsidies would lead to a diminution of foreign currency intake. Reducing the subsidy to basic commodities would cause prices to rise and would accelerate inflation. Nevertheless, we decided to decrease subsidies on basic commodities, principally on fuel, so as to save foreign exchange - although we were aware that this would have an inflationary effect.
Out of the $10 billion which constitute the operative state budget, almost half is slated for defense. It was decided to cut the defense budget by $300 million, with the remainder being cut from education, health, welfare, construction, infrastructure, and administration.
A week later, the government decided on the second step - saving foreign exchange. Here, too, we knew that it would have an effect on the inflation. But between January and October of this year, the inhabitants of this country spent about $1 billion on foreign travel; a few hundred millions more were spent on imports of luxury goods. The government therefore decided to cut in half the allocation for foreign travel, and to ban the import of luxury items for at least six months.
And now we have come to the two decisive challenges: Checking inflation and reviving economic growth. Both of them have social implications: checking inflation must not fall only on the heads of the workers, and resumption of growth must serve as an opportunity to encourage and develop the development areas and towns. Furthermore, care must be taken that one challenge not ruin the chances of meeting the other one. If we only deal with checking inflation, then mass unemployment could ensue; if we worry only about renewing economic growth, then inflation could rise to new heights. To stop inflation requires dialogue at home, via negotiation; to renew economic growth, we need to persuade outside factors to invest.
We have therefore set up an apparatus for dialogue among the components of Israel's economy: A joint economic council consisting of the government, the Histadrut, and the coordinating office, which is the employers' association. The council comprises 18 members, with myself at its head. It began work by setting up committees of experts to propose detailed ways to halt inflation, reduce unemployment, increase labor productivity, expand tax collection, and combat black capital.
The finance minister set up a small staff of experts, which even now is meeting to put the finishing touches on its work regarding the financial calculations, legal steps, and budgetary implications of a national accord, which is sometimes called a package deal. At the same time, talks with the Histadrut are continuing. Members of the Knesset, I was happy to read yesterday's decision by the Histadrut Central Committee, which said, inter alia: "The workers will be ready to contribute their part to an overall arrangement in the context of their contribution to the economy."
I take satisfaction in noting the decision by the United Kibbutz Movement to lower the standard of living by 5%; 1 very much regret the unjustified price hikes, knowing that a good part of the manufacturers condemn this as I do.
The plans are being completed; we are working at a good pace, without allowing panic any place in our judgments; and I hope that in the next few days, we will be able both to complete the negotiations and put the finishing touches on the details.
Simultaneous with the negotiations and the detailed planning process, it was also decided to take steps - mainly via turning to the United States - two prevent a sudden drying-up of the foreign currency reserves, or a shock to our banking system, or a massive outbreak of unemployment in our country. To this end, despite the delicate timing in the current U.S. political campaign, I decided to accept the invitation which I'd received from the President of the U.S., Mr. Ronald Reagan, and to set out.
When we - Mr. Shamir and I - came to Washington, we presented the real Israeli dilemma: How to remain a democratic and independent state, capable of defending itself, in a situation where the Arab threat is combined with massive Soviet aid - how to do this without destroying the Israeli economy, which is paying the high price of security; and furthermore, how to grant our economy a new and promising future.
For it is possible to strengthen Israel economically while weakening its defense; but what is really needed is to maintain Israel's defense standing and to enable it, like most of the democratic nations, to revive its economy.
We knew that we were going to visit friends, concerned friends but not unwilling to listen, and we decided not to conceal errors which had been committed in this country - errors and sins, but not crimes - we are not a corrupt country - and to describe the serious distress which has afflicted us - distress, but not a sense of total loss.
I made clear that in the economic sphere, as in the defense sphere, we mean to bear the brunt of the burden ourselves. But the economic burden, which also is a result of the defense burden, requires us to seek supplementary aid from without.
In the meetings we held with the President, the Vice-President, the Secretaries of State, Defense, and the Treasury, with leaders of Congress and party leaders, we had ample opportunity to present our problems and our plans, and we received, in the end, a friendly and encouraging response.
We said that we were determined to take the necessary steps ourselves for the recovery of our economy; but that in the interim period, the recovery period, we would need a "safety net" in the event of a sudden diminution of foreign currency reserves, or a deterioration of confidence in the Israeli banking system. We asked for an updating of defense aid, and in particular we asked whether the U.S. would be prepared to assist us in renewing the growth of the economy, in changing its structure to suit the new industrial age, and to assist us so that we embark on a new future, so that in the future, we would stand in less need of American aid. Without setting us any political or economic conditions whatever, the President and the administration decided to accede to these requests.
In order to create a "safety net," the President included in his public statement a declaration of faith in our economy; and he promised publicly that if, in our efforts to check inflation, we should encounter balance of payments problems, then the U.S. would work, in close cooperation with us, to prevent or overcome these problems.
Moreover, the administration decided to immediately transfer to us the entire sum of the economic assistance, $1.2 billion. The secretary of state added that if we should still run into foreign currency problems, the administration would be prepared to postpone the repayment of approximately $500 million in debts whose due dates fall between now and the beginning of next year, for 90 days; this is the period of time which the administration may decide on without congressional approval. I wish to say to the Knesset members that, of the $11 billion which we owe the U.S., $10 billion are for military equipment, and military equipment is not equipment which produces and thus makes it possible to repay debt. Therefore, any comparison with other economies is irrelevant.
We took note of this generous proposal by the secretary of state, but we have decided not to make use of it at this time; for we believe that if nothing unforeseen happens, then we will pay our debts on time in the future as we have done in the past, up till now.
In the defense sphere, we pointed out that the devaluation of the American dollar, which has lost approximately 68% of its value during the past decade, along with the rise in the price of modern military equipment - a Phantom cost $4 million ten years ago; today its replacement, the F-15, costs $40 million, ten times more; but no economy could grow ten times in ten years! - [We pointed out that] in view of these two developments, we need an updating of American assistance. The administration recognized in principle the justice of this argument, and decided to discuss at the working level both the scope of the aid and the I.D.F.'s equipment program for the next four years. The I.D.F.'s equipment program is normally based on quality enhancement, not on quantitative growth.
On the defense issue, too, we emphasized providing employment for Israeli industry, providing employment within Israel, both via increased orders from our military and civilian industries as part of the payment for the equipment we purchase from the U.S., and by opening the American market to Israeli products, and purchases in the Israeli market for the U.S. troops stationed in Europe and in our region.
But the main thrust of our effort on our trip was for the future. We asked that the U.S. help us to bring the Israeli. economy to the highest stage of qualitative development, considering the small size of our country, so that we could stand on our own two feet without needing outside props.
We explained that we wished to bring about a basic and far-reaching change in our economy and its structure, to base it mainly on science-based industries and high technology exports. To this end, we will tighten our national belt; but in order to provide a ray of light for tomorrow, it is also important that the U.S. aid us via investments, guarantees to investors, development loans, and the establishment of joint enterprises. We added that we intended to divert our own independent resources in this direction, as well our feeling that the Jewish people will contribute its share. We said that we could already embark on this development now. The ministry of trade and industry has drawn up a list of existing enterprises in Israel - outstanding enterprises which have the capacity to double their production starting now, and to establish branches in the development areas, so that the advent of tomorrow will not be delayed.
We said that we were bound and determined that the entire sum of aid, this aid for creating a ray of light for the new economy, would be used entirely for investment. Not a cent for consumption, for the standard of living; the entire amount for investment, investment in the future.
I must tell you, members of the Knesset, that this appeal received an especially favorable reply. The administration decided to speed up the process of signing the Free Trade Zone Agreement - begun by Minister Gideon Patt - and to conclude it within 30 days. This will make Israel the only country in the world which has trade ties, without customs barriers, with both the European Common Market and the general American market.
In addition, Mr. Reagan included in his presidential statement the following paragraph, and I quote: "I heard," said Mr. Reagan, "A bright vision of Israel's economic future as a dynamic competitor on world markets. We have agreed to explore with Israel ways to enhance its growth and development prospects through structure adjustment, increased trade and investment, as well as American aid."
In order to implement this promise, we agreed on the formation of a joint working group, to be headed by senior representatives of the two governments; it will be supported by a group of economists, industrialists, and investors, and its activities will be followed by representatives of the congress and members of the Knesset, so that all the factors will coordinate their activities and work together to immediately plan this transformation and assist during the transition period in our economy - so that we can emerge from our present situation and enter the new era which has already opened in industry throughout the world.
Members of the House, one must not belittle the tremendous difficulties awaiting us in our effort to halt the runaway inflation. The government cannot promise an easy transition. We will have to moderate our standard of living, give up luxuries, and return to being a country of working people. I call on the entire public to display economic patriotism, which is vital for this period. Such patriotism must show itself by daily concern on the part of every citizen and all the citizens, by self-restraint in spending, by increasing savings, by preferring to buy local products, by honest payment of taxes, increased productivity, and rejection of any manifestations of profiteering.
The government will have to take a number of courageous decisions in the coming days - and it will do so. It will make certain that the lower income groups will not be harmed, and that the higher income groups will not be pampered.
We have a great opportunity to renew the growth of the economy and to create a new economy. Our society has both visible and hidden strengths: Good workers, outstanding scientists and technologists, resourceful inspired investors; and many of them are imbued with a love of the country, pioneering enthusiasm, and a sense of responsibility. There are no grounds for defeatism among us. I am not impressed by expressions of scorn and scepticism. We have done great things in the past, and we will do great things in the future, until we again become one of the most flourishing economies in the world, and are once more one of the most creative and just societies of our day.
Members of the Knesset, the government is concerning itself with securing peace for the Galilee so as to enable our soldiers to return home. In the government's basic guidelines, it says: "The government will do everything necessary to ensure peace for the Galilee. Security accommodations will be determined to enable an I.D.F. withdrawal from Lebanon, within a short period of time to be fixed by the government." Approximately three weeks ago, the Ministerial Defense Committee decided on the first stage whereby we must act so as to achieve this goal. Next week, the cabinet will discuss this stage and the stages to come.
At every stage, it is inadmissible that the peace of the Galilee or our soldiers' well-being should be sacrificed on the altar of Syrian or Lebanese prestige.
Israel has no intention of remaining on Lebanese soil or of taking part in the conduct of its affairs. Lebanon's leaders, including Rashid Karameh, tend to forget their share in the disaster that befell the people of Lebanon; when they allowed the P.L.O. to establish centers of terrorism in their land, they exposed Lebanon to preventive and retaliatory operations. And when they revoked agreements with Israel - the 1949 Armistice Agreement, and the 17 May 1983 Agreement, capitulating to Syrian pressure - they undermined the value of agreements signed by Lebanon. Nevertheless, Israel is still interested in an independent and peaceful Lebanon, a Lebanon which is neither prey to Syrian conquest nor a cradle for P.L.O. terrorism.
We believe that the way to reach a general and comprehensive solution which will ensure peace for the Galilee without harming the peace of Beirut, or even that of Damascus, is via political arrangements with Syria and military arrangements with Lebanon. Israel asks no favors from Syria. It is for Syria to decide whether it wants the I.D.F. to continue sitting 25 kilometers from the gates of Damascus. Israel's position vis-a-vis the eastern line in Lebanon is clear and reasonable. It is unthinkable that, following the I.D.F.'s evacuation, the Syrian conquest should expand westwards or southwards; and it is unthinkable that the area under Syrian control should serve as a base for infiltration into Israel or for terrorist operations.
The military arrangements in Lebanon are based on a commitment that Lebanon already made in the past: Namely, that in the area bordering Israel, whence there is the danger of fire or attacks on Israel, a local Lebanese force will be posted which will represent the desire of the inhabitants of southern Lebanon for peace, as much as the need to prevent the establishment of forces seeking to attack Israel. North of that force and south of the other Lebanese forces - and in the area between the sea and the Beka'a - U.N.I.F.I.L. troops will be deployed, to prevent tension being created among Lebanon's various forces.
Lebanon's leaders must understand that Israel is not their country's enemy, and that we are interested in fair relations with all of Lebanon's residents and ethnic groups: the Christians, the Muslims, and the Druze. But Lebanon's leaders must come to terms with the present situation: How can they ensure quiet in southern Lebanon when they have not yet succeeded in ensuring the safety of Beirut? We have no objection to contacts between General Lahad's forces and other Lebanese forces; for in any case, this is the existing situation in Lebanon, a country in which a military coalition exists parallel to the civil one.
If the Lebanese government wants Israel to treat it with respect, it must treat Israel's vital interests with respect. And the sooner it does so, the easier it will be for all of us. We will do all we can to speed up the processes so as to put an end to our involvement in Lebanon, after arrangements have been made to ensure peace for the Galilee. Israel will look for partners for these processes, but it alone will determine the timing and the moves.
We seek to reach a settlement of the disputes between us and our neighbors by peaceful means and political negotiations. We invited Jordan to peace talks in order to open a new chapter in the region. Despite the negative public response, Israel will continue to propose honorable political talks in which Jordan will be able to bring up whatever proposals it sees fit to make for the negotiating agenda.
We want to have peaceful, coexistence with the residents of the territories. We will continue to maintain the open bridges and to enable all inhabitants to act to improve their situation, so that they can live in dignity from their labors. At the same time, we will respond will all due firmness to any attack on the lives of the citizenry - Jew and Arab alike. Whatever the views on the future of the territories may be, the government of Israel, will ensure the safety of the inhabitants and the safety of the roads for all inhabitants.
I sent a message to the president of Egypt proposing that we work together to improve relations between our two countries. Mr. Shamir met with the Egyptian foreign minister, and they had a serious and fruitful talk. Egypt is the leading Arab country, and it is in the interest of all of us that it be able to play leading role in advancing the peace process in the region, and that the peace treaty which was signed between us take on political, economic, and social content.
Members of the Knesset, our relations with the United States will continue to be a cornerstone of Israeli foreign policy. These relations have an historic depth, democratic content, and widespread popularity, and the decree of warmth in these relations has been on the increase since the founding of the state. They are based on shared values, and are imbued with sympathy between the two peoples over and above their formal establishment. We thank the President, the administration, the Congress, and the people of the United States for this attitude.
The Soviet Union is not our enemy; but Israel cannot accept its one-sided policy, which almost blindly backs every hostile position expressed in the Arab camp. At the same time, Israel would be willing to resume diplomatic relations the moment the Soviet Union - which revoked them - would initiate such a resumption. Naturally, our first priority is the fate of the Jews in the Soviet Union. A people's identity cannot be suppressed by administrative means, and no regime will manage to lock Jewish history behind prison bars.
Israel is the country of its citizens, but it is also the only country for the entire Jewish people. We will not rest or be easy until the Jews of Russia, the Jews of Syria, and the Jews of Ethiopia are redeemed from their exile.
Immigration to Israel must once more occupy a primary place among our activities as regards both the Jews living in the free world and those Jews whose freedom has been denied them. We believe that the proper place for both the prosperous Jews and those in distress is in the State of Israel.
Members of the Knesset, no one has ever pampered us; we were born in distress, distress afflicts us even now. Our nation has never bowed to distress; it has been tempered by it. Neither the voice of despair nor the theme of acquiescence will characterize our lives. Hope will remain the true voice of our deeds and our way of life; and we shall overcome, despite all the difficulties.