One of the wonders of the past year has been the relative stability of the economy. If someone had done a theoretical exercise on the Israeli economy, taking note of the serious security situation, terrorism and killings, blows to the high tech industry, tourism and construction, nobody would have expected that despite everything, the economy would retain its financial stability.

At the same, however, it's impossible to say the financial economic crisis is over. This week's devaluation proves that Israeli economic stability is quite fragile and not at all certain. Nobody has it locked up. And when discussing economic stability, it's worth remembering that the government is responsible for it - and the main tool for preserving that stability is the budget, particularly the budget deficit.

This week the government approved its budget for 2002 with a deficit of 2.4 percent of the gross domestic product (GDP). Will 2002 indeed end with such a deficit? Or is the deficit target too high and endangering stability?

Increasing the deficit. A year ago, the Barak government decided on a 1.5 percent deficit for 2002, so the decision made by Ariel Sharon and Silvan Shalom to raise it to 2.4 percent means increasing government spending by NIS 4.5 billion, 0.9 percent of the NIS 500 billion GDP.

Growth. To avoid cuts in expenditure, the treasury put on a pair of very rosy spectacles and predicted 4 percent growth in 2002, compared to the barely 1 percent of this year. That optimistic projection, which most economic forecasters oppose, allowed the treasury to improve its prognosis for tax revenues and thus improve its picture of the deficit as presented to the public. Every 1 percent in growth means an additional NIS 1.5 billion in taxes, so assuming growth next year is 2 percent, the treasury's "growth trick" adds another NIS 3 billion to the expenditures planned.

Data laundering. When the Tax Authority presented its estimates for 2002, it said that even if there is 4 percent growth, the tax revenue estimate should be reduced by NIS 1.5 billion because corporate profits are down, and there are going to be large tax rebates for 2001. But treasury officials didn't like that reservation, and rejected it, so the NIS 1.5 billion remains in place.

Adding up the these three elements comes to NIS 9 billion more that the treasury is allowing the government to spend. In other words, if growth really is only 2 percent, and corporate profits do indeed decline, 2002 won't end with a deficit of 2.4 percent, but of 3.3 percent of the GDP - and that's dangerous. How dangerous?

Increased interest payments. The government pays NIS 30 billion a year in interest on its debt and that's at the expense of the health, education and welfare services. Just for comparison, the education budget is NIS 24 billion. Increasing the deficit means paying more interest, which comes out of services to the public.

Rising interest rates. Between December 2000 and July 2001, linked interest rates in the economy dropped, but in August they rose. The reason is the expected outlays in next year's budget, government capital raising in August, and the coming large deficit. The result: rising interest rates, which mean fewer investments and mortgages and less growth.

Undermining stability. If the public believes the deficit is too high, inflationary pressure builds up along with growth in the balance of payments. That leads to speculative demand for the dollar, which means a sharp devaluation, that could wipe out the stability.

Oversized government. It might have been possible to talk about increasing the deficit if the situation was better at least as far as public spending is concerned, compared to Western countries. But it turns out the public debt is very high, 92 percent of the GDP; the tax burden is very high, 41 percent of the GDP; government spending is 45 percent of GDP and public expenditure is 54 percent of the GDP - the highest levels of 20 western countries.

So, those who try to grow the economy by increasing the budget and the deficit, won't get what they want. Sure, maybe there will be some short-term artificial growth but it won't be healthy growth and it will end in a financial crisis, uncontrolled devaluations, growing inflation and a balance of payments crisis. And when that happens, the government will convene to decide on a comprehensive budget cut, to prevent the crisis from getting worse. Maybe it would be better to prevent the whole problem ahead of time.