Israel slashes budget deficit

The blockade of Palestinian land is hurting Israel economically

Israel's cabinet has passed the budget for 2002 by the narrowest possible margin, agreeing over 6bn shekels ($1.4bn) in cutbacks and admitting that growth will be half what it previously predicted.

The approval came on a 14-13 vote, with the veteran Labour Party foreign minister, Shimon Peres, abstaining.

I have not heard of any plan that is meant to deal with unemployment, the Israeli economy's biggest enemy

Dalia Itzik
Labour Party minister of industry and trade

That set him aside from most of his party colleagues - as well as from the ultra-Orthodox Shas party, which has won huge tax exemptions and payouts for its constituency as the price for its support for the National Unity government.

The approval sets the stage for further knife-edge political bargaining.

Israeli law says the budget has to be passed by 31 December, and after a stormy first assent in the Knesset (parliament) it still has two readings to go.

The first reading almost foundered largely because lawmakers, particularly from minority parties which work in much the same way as Shas, insisted spending was already too tight.

Managing expectations

The cuts still leave the 254.8bn shekel ($60bn) budget showing a deficit of 3% of GDP, double the deficit last year.

Tourism has slumped since 11 September

Government revenues are down 15bn shekels year on year, in an economy strangled by 10% unemployment, slumping exports, a tech sector in the doldrums and tourism which dried up almost overnight after 11 September.

Adding to the burden is the blockade of the occupied territories. Imposed for security reasons, it nonetheless means that the hundreds of thousands of Palestinians who previously worked in Israel are now - officially at least - economically inactive.

Aside from the economic damage done to Palestinian families and businesses, Israel has lost a huge slice of economic activity and government revenue as well

And most economists say even the new deficit figure - up from previous predictions of 2.4% - is over-optimistic.

Similarly, the widely derided forecast of 4% growth in 2002 has been slashed to just 2%.

Who loses what?

Where the budget cuts will be made has yet to be revealed.

A further cabinet meeting on 20 December is meant to identify where the axe is to fall.

Labour will probably refuse to back the budget should cuts be made to employment programmes.

"I have not heard of any plan that is meant to deal with unemployment, the Israeli economy's biggest enemy," said Dalia Itzik, a Labour Party member and the minister of industry and trade.

Similarly, right-wing parliamentarians from Likud, the party of Prime Minister Ariel Sharon, will be less than happy if cuts were made to the defence budget.

Israeli commentators predict that about 3bn shekels will come equally from defence and health.

The rest is still unresolved. Finance minister Silvan Shalom said the overall tax burden would not change, even though some of it might be shifted onto higher earners.

The 2002 budget also includes over 30bn shekels in assorted tax breaks, many of which are politically sacrosanct.