The 1985 Stabilisation Plan

How Israel suffered inflation of over 400% in the early 1980s and ended it with a 1985 plan combining spending cuts, a fixed exchange rate and wage agreements.

In the early 1980s, Israel had very high inflation.

The crisis

Inflation exceeded 400% a year by 1984.

Causes

Large budget deficits, partly from defence.
Indexation of wages and prices.
A banking crisis in 1983.

The 1985 plan

Deep spending cuts.
A fixed exchange rate.
Temporary wage and price freezes agreed with unions and employers.
US aid support.

Results

Inflation fell quickly to about 20%, and later lower.

Central bank

A 1985 law stopped the Bank of Israel from financing the government deficit.

The indexed wage

Before 1985, wages were adjusted for inflation constantly, feeding a spiral.

Thinking inflation can only be cut slowly

Israel's plan worked quickly.

Key takeaways

Inflation exceeded 400% by 1984.
Deficits and indexation drove it.
The 1985 plan combined cuts, a fixed rate and wage deals.
Inflation fell quickly.