The hot topic for debate in Israel over the past couple of months has been Finance Minister Benjamin Netanyahu's emergency economic plan. Israel's economy has been in dire straits since the Palestinian intifada began 2.5 years ago, a situation made worse by the bursting of the dotcom bubble and the downturn in the global economy. According to government statistics, Israel's gross domestic product has fallen by a cumulative 3 per cent and GDP per capita by 7 per cent since the war with the Palestinians started in September 2000. 'The chief factor in [last year's] GDP decline was the damage caused by the Palestinian terror war, while the global hi-tech crisis was more important in 2001,' a government statement says. Financial ratings agency Standard & Poor's has warned it may downgrade Israel unless it slashes its huge budget deficit. Israel is 30 billion shekels (about HK$52 billion) in debt, according to the government. A total of 55 per cent of its GDP comes from the public sector, placing an intolerable burden on the wealth-creating private sector. Unemployment stands at 10.4 per cent, and is rising as businesses close, reducing the size of the private sector by 1 per cent a year. Three months into his job, Mr Netanyahu is striving for massive structural reform to stop the economic rot. His plan calls for deep cuts in all areas of government spending except defence, totalling US$1.88 billion. The deepest cuts are in education and welfare. These cuts, together with massive lay-offs in the public sector and wage cuts averaging 8 per cent for those who remain, have infuriated workers but have been welcomed by the financial sector. Merchant bank Credit Suisse First Boston (CSFB) says Mr Netanyahu's reforms must be implemented in full to succeed. 'The appointment of Benjamin Netanyahu as finance minister could help restore market confidence in the government's economic policies, due to his political heavy weight and his international reputation, provided the Knesset does not undo all his reform efforts, particularly on the fiscal front,' a CSFB report says. Mr Netanyahu hopes to revitalise the economy by cutting income tax to encourage people to work, introducing reforms to encourage greater investment, imposing a tax on foreign workers to make it more profitable to employ Israelis, investing in infrastructure and privatising state-owned companies. The finance minister's ambitions to turn Israel's economy around have been helped by recent data that shows the country's downturn is slowing. Revised figures released by Israel's Central Bureau of Statistics for the fourth quarter last year indicated the recession was slowing, or even reversing. Growth in that quarter was revised to 0.2 per cent, compared with minus 1 per cent for all of last year. The growth rate is now within the lower limit of the Ministry of Finance's 1 per cent target. The Central Bureau of Statistics reported earlier this year that fourth-quarter growth was minus 0.5 per cent in annual terms. The revised growth figure is a result of a 5.8 per cent rise in exports, assisted by the depreciation of the shekel against the euro. Exports have continued growing this year, although there has been no real improvement in private consumption, investments or imports. CSFB forecasts Israel's GDP will grow 0.1 per cent this year and by 1 per cent next year. The effects of the war in Iraq and the Palestinian conflict, and a lack of demand for Israeli goods are draining the economy, CSFB economist Umberto Alvisi says. Sluggish demand for its exports is particularly damaging, because Israel lacks natural resources to underpin its economy, making its health dependent on that of its trading partners. However, United States financial aid and moves towards fiscal consolidation ought to help Israel steer clear of a Standard & Poor's downgrade, Mr Alvisi says. Recent setbacks aside, Israel has undergone a massive transformation from an underdeveloped backwater to a Western-style economy over the past 50 years. JERUSgsp
