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Monday, 22 April, 2002, 18:50 GMT 19:50 UK
Defence costs bloat Israeli deficit
A woman walks through the streets of Ramallah
The cost of invading the Palestinian territories have been huge
Israel is taking a hatchet to its budget to try to cope with the swelling costs of the Palestinian uprising.

The Finance Ministry said on Monday that it is proposing cuts to the 2002 budget of as much as 13bn shekels ($2.7bn; 1.9bn) together, perhaps, with some tax hikes on cigarettes and petrol.

That could spell further trouble for Israel, whose economy is already beset by the slowdown in the tech sector which saw growth plummet from around 7% in 2000 to a 0.6% contraction in 2001.

The down turn has triggered a significant fall in tax receipts, further exacerbating the problems.

More pressure on Israelis has come today from the Bank of Israel's decision to raise interest rates by 0.2% to 4.6%.

Bursting

Even before the Israeli Defence Force began their incursion into Palestinian-controlled areas in late March, the budget was straining at the seams.

Earlier this month, as "Operation Defensive Wall" got under way, Prime Minister Ariel Sharon approved a 2bn shekel expansion to the defence budget.

Increased security spending as a result of the renewed Palestinian uprising - which began in 2000 - has combined with Mr Sharon's need to keep the rightwing religious parties in his government.

That meant boosting spending on large families, for example.

Now, though, some of that extra spending could have to go to make up for the defence budget's growth.

It remains to be seen whether Mr Sharon will sanction such a move.

Among other proposals is a boost in VAT to 18% from 17%.

Deficit finance

In the meantime, Israel faces more troubles ahead.

Finance Minister Silvan Shalom said the government's original hopes that the deficit on the 250bn shekel budget would stay below 3% were unrealistic.

Instead, it is aiming for 3.5-3.9% of GDP - although many observers think the actual figure is likely to be closer to be almost double that.

With little or no growth expected this year, Israel's debt could well face a downgrade, making it more expensive to borrow money.

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Emmanuel Hart, president, Orgenics
"It will effect every one of us with higher taxes and also inflation."
Zvi Marom, chief executive, BATM
"In terms of pain between zero and 10, I'd say companies are suffering at level 4 or 5."
See also:

03 Apr 02 | Business
Shekel gains brief respite
18 Feb 02 | Business
Israeli economy mired in crisis
01 Jan 02 | Business
Israel misses budget deadline
18 Dec 01 | Business
Israel slashes budget deficit
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