The attention of Israelis and of the world is focused on
Iraq. After that comes Palestinian terror. But many feel that
Israel's economic problems are not fully appreciated,
especially the need to make drastic budgets cuts very
soon.
Prime minister Sharon, although he has little personal
knowledge of economics, seems to feel the pressure. On Monday
he met with Yaakov Frenkel, former Governor of the Bank of
Israel and currently head of Merrill Lynch International. The
announced purpose of the meeting was consultations, but the
rumors were that Sharon asked him to be Minister of Finance.
On Tuesday Yoav Yitzhak reported that Yaakov Ne'eman, a
friend of Frenkel and Minister of Finance under Binyamin
Netanyahu, would be asked to become Governor of the Bank of
Israel.
Top treasury officials have warned Prime Minister Ariel
Sharon that he must urgently cut at least NIS 10 billion from
the 2003 budget of over NIS 200 billion. They also want him
to apply reforms and structural changes including mass
firings in the civil service and wage cuts in the public
sector, as well as steps to improve future productivity and
investments in infrastructure.
Finance Ministry director general Ohad Marani, accountant
general Nir Gilad, and Budgets Department director Uri Yogev
told Sharon that a budget cut of NIS 15 billion is necessary
if no other measures are taken.
The adequacy of the lower cut also assumes that Israel will
get $4 billion requested in military aid and loan guarantees
for $8 billion from America over the next three years. The
government could also use a calmer security situation and
lower interest rates.
Treasury officials said the details of the cuts will be
decided only after Sharon and the finance minister determine
which alternative to plan.
This is all based on a current deficit target of 3 percent of
the Gross Domestic Product (GDP), and based on new and lower
estimates of tax revenues for the coming year. Treasury
officials said that taxes must not be raised because of the
already heavy tax burden.
Marani said the Treasury would like to collect VAT from fruit
and vegetable sales and also to introduce it in Eilat, which
has been VAT-free since the early 1980s. It also wants to
eliminate tax benefits for settlers and development towns
within Israel.
Marani called cuts in the public sector "the heart" of the
treasury plan. In addition, reforms in unemployment
compensation are expected to bring more people into the work
force.
The Treasury officials told Sharon the State will have to pay
NIS 2 billion more in interest on loans than the originally
planned NIS 33.3 billion. They said tax revenues will be NIS
13-14 billion less than the NIS 157.9 billion projected in
the budget Finance Minister Silvan Shalom presented at the
end of last year.
The Central Bureau of Statistics said this week that the 2002
GDP contracted by 1.1 percent, meaning the recession is worse
than reflected by preliminary figures of negative 0.9 percent
growth.
The Palestinian uprising and the collapse of the world
technology market have plunged Israel into more than two
years of recession, the longest in the country's 55-year
history. This year is shaping up as another tough one.
Statistics bureau official Soli Peleg said the economy may
contract up to 0.5 percent this year. Israel's economy grew
more than 6 percent in 2000.
The economic contraction is particularly tough in Israel,
since its population grows faster than that of most Western
countries. Last year it grew by about 2 percent, compared to
Western countries where growth is minimal or even negative in
a few cases. The shrinking of the Israeli economy by 1.1
percent thus means a decline of almost 3 percent in per
capita GDP, which now stands at about $15,600.
