Israel's Untouchable Entitlement Programs

By Frank Collins

How much is Israel costing the U.S. in 1993? What has been the total cost of Israel to the U.S. taxpayer since its establishment in 1948? These are the two most frequently asked questions by readers of the Washington Report on Middle East Affairs.

There is no single answer to either question because there are many different ways to calculate these costs. For those who would minimize the visible cost of Israel to U.S. taxpayers, Congress designs legislation that makes U.S. military equipment available to Israel, but keeps the cost outside the military assistance budget. Similarly, some economic grants appear outside the foreign assistance budget.

In the budget for the current 1993 fiscal year are U.S. grants for $1.8 billion in military aid and $1.2 billion in economic aid to Israel. In addition, there are special grants of various kinds totaling $91 million. This means that $3.091 billion has been added to the already staggering federal deficit in this fiscal year.

This total does not include items such as $700 million for the "drawdown" of U.S. weapons from Europe and their transfer to Israel, the creation of a $300 million U.S. weapons stockpile in Israel and contributions of fuel tanks and oil to fill them for a $180 million petroleum reserve in Israel.

These items total an off-budget $1.18 billion. The rationale for omitting these items from the budget is that they nominally remain U.S. property, although it is certain that this country will never see them again. These items bring this year's outlay past the $4 billion mark to $4,271,000,000.

Chairman Lee H. Hamilton of the subcommittee on Europe and the Middle East of the House Foreign Affairs Committee also notes that the sleight-of-hand practice whereby Israel receives its full annual grant at the beginning of each fiscal year, instead of quarterly, as do all other recipient countries, costs the Treasury more than $50 million in interest.

With the U.S. budget greatly out of balance, grants-in-aid for Israel are added to the federal debt each year instead of being paid off on a current basis. The U.S. Treasury then must pay compound interest on the cumulative grants (interest both on the unpaid principal and on the unpaid back interest) until such time as the national debt is liquidated. Over the years, the compound interest on the U.S. debt is far greater than the principal itself, a proposition that is readily understood by every homeowner with a mortgage.

By the end of FY 1992, the total of grants that had been extended to Israel since 1951 was $44.8 billion. Adding compound interest calculated at the prevailing interest rate for each of the past years brings that to a total of $80 billion added to the national debt. This figure does not include the many off-budget items such as the $1.18 billion cited above for 1993. This year's interest on the $80 billion will amount to $5 billion at last year's interest rates, an amount greater than this year's on-budget grant of $3.091 billion. The $5 billion is included in the federal budget in the item "interest outlay." Annual compound interest due to grants to Israel has been greater than the annual grant to Israel since 1988.

There is also the practical question as to what the U.S. gains for its substantial aid to Israel every year. Most of the economic aid granted to Israel every year is used to pay back to the U. S. Treasury the interest and payments due on principal for loans prior to 1974 (as distinguished from grants). This forgiveness of loans is provided for under the terms of the Cranston amendment, which has been attached to each year's grant package since 1984. In effect, the Cranston amendment provides a mechanism for the incremental conversion of all past U.S government loans to Israel into outright grants.

The military grants are mostly, but not completely, expended on U. S. weaponry. Some of the money is earmarked for the Israelis to buy military hardware and services from themselves. Israel's public relations people argue that since the bulk of U.S. military aid is spent by Israel to purchase U.S. weapons, the cost to the U.S. taxpayer is nothing. This is as absurd as saying that a merchant loses nothing by giving away instead of selling the store's merchandise to its customers.

The Loan Guarantees

In addition to the grants-in-aid, Israel has asked the United States to guarantee $10 billion in private loans to Israel over the next five years. As reported in the Washington Report's February 1993 issue, the agreement covering the first installment of $2 billion of the loan guarantees was signed by President Bush in January.

Unlike agreements of this kind with all other countries receiving loan guarantees, the document signed with Israel does not require U.S. approval of individual projects to be financed under the loans, thus giving the Israeli government the opportunity to spend the money in any way it chooses. This makes a dead letter of the requirement passed by Congress that the loan money not be expended for projects in the occupied territories. This is exactly what happened in the case of $400 million in loan guarantees for housing for Russian immigrants extended by the U.S. to Israel two years ago.

The money borrowed by Israel under the U. S. guarantees promises to be little more than a gigantic slush fund in the hands of the leading Israeli politicians for their partisan interests. When, after 10 years, Israel is forced to begin paying back the principal on these loans, it is utterly predictable that Israel will default, making the U.S. government liable for the entire amount of the loans, or that Israel will request a further increase in U.S. government aid in order to cover repayment of loans obtained under U.S. Loan guarantees. Either way, this adds an additional $2 billion to the U.S. taxpayer liability for fiscal 1993.

To summarize, the cost of on-budget aid to Israel from 1951 through 1992 is $44.8 billion. Adding compound interest for rates prevailing in each of the 42 years involved, the cost becomes $80 billion. Additional 1993 costs of more than $11 billion are summarized in the accompanying box.

Frank Collins is a free-lance journalist specializing in the Middle East.