The Histadrut labor federation on Tuesday threatened to lead a general strike in response to the treasury's proposal for the 2007 budget, which cuts back on social welfare costs.

"If the treasury does not backtrack on its unilateral decisions on the budget proposal and meet with us for fair negotiations, we will not hesitate to go on a general strike even before the Economic Arrangements Bill passes," Histadrut Chairman Ofer Eini said after the proposal was presented, adding that it was "worse than Netanyahu's budgets."

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"The treasury has enough money to cover the war expenses. Only recently, for example, the Iscar deal was signed, giving the state over NIS 4 billion in profit," he said. "The Finance Ministry is conducting itself as a private business aimed at maximizing its revenues and not at serving the public."

Finance Minister Abraham Hirchson on Tuesday presented to the government the treasury's proposal for the 2007 state budget, according to which minimum wage and current government stipends would be frozen.

The decision could pave the way for further confrontation within the coalition. Labor Party leader, Defense Minister Amir Peretz, told confidants Monday that "if they don't revoke the intention to freeze the minimum wage, it will lead Labor to quit the government. That is a red line as far as I'm concerned. It is the central achievement of the coalition agreement."

The treasury's decision to push off planned increases to the minimum wage in 2007 - a plan which had been anchored in Labor's agreement to join the coalition - would save the government NIS 340 million. By freezing increases to government stipends, the government would save an additional NIS 1.12 billion.

Hirchson said Tuesday that no more than NIS 3 billion would be added to the defense budget to fund the war in Lebanon.

"War is not an excuse to grant the state a blank check," he told a press conference.

Hirchson said Prime Minister Ehud Olmert accepted a treasury proposal to appoint a panel of experts from the treasury and defense establishment to determine the rest of the defense establishment's budgetary demands, as well as the make-up of the defense budget.

"The war forced new priorities and constraints upon us. The war was a month-long event, but the impact on the economy could be long-term. We went into the war with surplus revenues that no longer exist. They were used to rehabilitate the north and to compensate those whose houses and businesses were damaged," Hirchson said.

He went on to say that rehabilitating the north would require an additional NIS 1.5 billion in 2007.

The Finance Minister stressed that he has no intention of raising taxes and noted that despite the war, NIS 2 billion would be added to social welfare budgets in 2007.

Hirchson said that the main parties adversely affected by the recession in the early 2000s were weaker social classes. "The rich did business abroad. I won't let Israel slip back into a recession. I won't let the economy spiral out of control and repeat mistakes of the past. I won't let the events of 2000 repeat; I won't let interest levels go up and I won't let inflation rise."

At the press conference, treasury officials presented figures on the cost of the war. According to the figures, the war cost NIS 13-14 billion.

Labor, Shas and Pensioners threaten to bolt government
The Labor Party, Shas and the Pensioners threatened Monday to vote in the cabinet against the budget if social welfare cutbacks were included in the budget book.

Despite the agreement reached on Monday between Olmert and Hirchson to rescind plans to raise university tuition, Kadima's coalition partners are threatening a crisis unless the treasury also retracts planned welfare cuts.

Labor's ministers are set to convene by week's end to formulate a stand on the budget. "If Olmert wants to preserve the coalition, he will have to back down," Peretz associates said.

Senior Laborites said it looked like Olmert had "put on a show" with the issue of tuition, and that it seemed as though the PM had coordinated with Hirchson, "to make it look like he cares about social welfare."

Sources close to Olmert said Monday that they were not impressed by the threats, and that a similar crisis traditionally accompanies budget debates. The budget will be approved by the government even without Labor and Shas, they said, since the Pensioners are expected ultimately to vote in favor. Olmert's confidants added that while he backs the finance minister, the budget is likely to undergo further changes before Sunday. But if Labor's seven ministers, Shas's four and the Pensioners' two vote against the budget, it will not pass. Shas chair Eli Yishai, the minister of Industry, Trade and Employment, stressed during talks on Monday with political officials that if the budget does not meet the party's welfare demands and the allowances are slashed, the Olmert government will fall.

Yishai took a combative line Monday, saying that Shas would vote against the budget in the cabinet and Knesset, and would quit the coalition. He suggested cancelling the reduction in Value Added Tax to generate additional funds.

Meanwhile, the Pensioners' ministers announced Monday they would vote against the budget if it harms the elderly. Health Minister Yaacov Ben Yizri said his party would not agree to a single violation of its coalition agreement.

"Recovery in the North and the defense establishment cannot occur at the expense of pensioners, the elderly and allowance recipients," Ben Yizri warned.

Kadima ministers too criticized the budget on Monday on social-welfare grounds, saying it would be a serious mistake for Kadima to be the party that hurts the weak segments of society.

Labor's Agriculture Minister Shalom Simhon called for the defense establishment to reduce its demands so the government can tackle urgent social problems, while Science and Sports Minister Ophir Pines-Paz said a combined solution is required to meet defense and welfare needs.