Finance Minister Silvan Shalom, when presenting the highlights of his new economic program on Wednesday, said Israel is in a state of emergency of both security and economics. Increased defense spending is needed to fund the war on terror, especially Operation Defensive Shield and was one factor that made the emergency economic program necessary. But this is not the only factor, or even the most important one. The real problem in the state budget developed even before the operation began - and it is not on the expenditures side of the ledger, but on the revenue side - the sharp drop in tax income that started in 2001 and has worsened this year.
The reason for the decline in tax revenues is the standstill in economic activity. This year, it has acquired dramatic dimensions due to the gap between the original forecast made in 2001 for economic growth - a 4 percent increase in gross domestic product - and actual growth, which will be zero at best, and might even be negative.
It is true that the worldwide economic slowdown, especially the collapse of the dot-com and high-tech sectors, has contributed to the Israeli recession. But the severity of the downturn here is immeasurably greater than in other western countries, so it is clear that there are also other factors. The principal reason can be found in the fact that Israel continues to hold the territories it conquered in 1967.
On the surface, it might seem that increased security spending is an accurate measure of the cost of the occupation, but this is not so. That cost is also hidden in dozens of other line items in the budget that are not necessary related to security - in civilian expenditures that relate to the cost of maintaining the settlements.
And even these outlays, which along with defense costs come to billions of shekels a year, do not reflect the true economic cost of the occupation. To find this figure, one must work out the value of the national product that is not being created because of the recession. Every percentage point of GDP is equal to at least $1 billion, and the economy's growth potential is an estimated 4.5 to 5 percent of GDP per year. Thus we are talking about a loss of GDP equivalent to billions of dollars.
The shortfall in the state budget and the GDP that has not been created are abstract numbers to most Israelis, but their painful effects are very tangible. Over the next few months, and in fact at least through the end of 2003, people will have to pay higher taxes, subsist on smaller transfer payments, make do with reduced government services and meet more stringent criteria to obtain benefits.
And some of the price is being paid in other ways, which are sometimes even more painful. Because of the recession, the number of businesses that have shut down and the number of people who have lost their jobs has grown, and will continue to grow. Those businesses that have managed to stay afloat are encountering ever-increasing difficulties - in the domestic market because of the decline in demand, and in the export market because of the reservations many companies and organizations have about doing business with Israel.
It is hard to assess the total effect of the occupation on the economy, but it is rapidly acquiring traumatic proportions. While the developed world, and particularly the United States, is showing clear signs of recovery, Israel is sinking deeper and deeper into recession. In the absence of any political horizon to the conflict, which would include an end of the occupation, this decline is liable to become permanent
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