The cabinet is expected to approve the 2009 Budget Law and the Economic Arrangements Law this morning. Next year's budget will total NIS 319 billion, but where some NIS 7 billion in cuts will come from is still unknown. This is the main issue yet to be resolved.

The focus of this morning's debate will be the treasury's request to trim between NIS 900 million and NIS 2.1 billion from the planned increase in the defense budget, as recommended by the Brodet Committee. The Defense Ministry, for its part, is demanding an additional NIS 2 billion in both 2008 and in 2009, mostly to make up for inflation.

Over the weekend, Prime Minister Ehud Olmert and Finance Minsiter Roni Bar-On continued their contacts with ministers, alongside talks between senior treasury officials and their counterparts in other government ministries, all in order to reach agreements on next year's budget.

The treasury has proposed two alternatives for the cuts, leaving the decision in the ministers' hands. The first option would make most of the cuts in the social-welfare budgets; while the second option is to cut defense spending.

Officials from the treasury and the Prime Minister's Office expect the decision on how much to cut from the defense budget to be made today, in a three-way meeting among Olmert, Bar-On and Defense Minister Ehud Barak. The PMO and treasury also expect the 2009 budget to pass the cabinet today, with the support of ministers from Kadima, the Pensioners Party and a number of Labor Party ministers.

Shas will vote against the proposed budget. The party is demanding increased child allowances, which is not included in the budget. Transportation Minister Shaul Mofaz (Kadima), a candidate to replace Olmert in the September Kadima primary, is also expected to vote no on the budget. A number of Labor ministers will abstain or vote against.

The treasury said at the end of last week it was clear the budgetary framework would not be breached, and the spending targets have not - and will not - be changed. The 2009 budget includes a 1.7% spending increase over this year and a planned deficit of 1% of GDP.

The treasury says the 2009 budget is based on current economic conditions and contains no painful measures for the general public. The treasury says that despite all the cuts, all ministries will have higher budgets in 2009.

The defense budget is the largest ever, at over NIS 56 billion, and includes the additions recommended by the Brodet Committee as part of the conclusions reached from the Second Lebanon War. Nevertheless, the Defense Ministry accuses the treasury of trying to force it to move NIS 1.3 billion from next year to 2010.

The Defense Minsitry is complaining it has been hit hard in 2008 by the strong shekel and weak dollar, as well as higher prices for for food, fuel and raw materials - all of which have cost defense some NIS 2 billion. The ministry is demanding full compensation for the price increases, and a similar amount for 2009, as defense expects the high costs and strong shekel to continue through next year.

In the past there was an agreed-upon mechanism for adjusting the defense budget to account for such inflation, claims the ministry.

The treasury is calling its proposals, including moving allocations from 2009 to 2010, fair. It rejects the demands for inflationary adjustments and is calling the Defense Ministry "selfish and egotistical," saying it does not consider the interests of the entire economy and has ignored a long lists of demands and additional funds the treasury met this year. These include NIS 300 million for the new reservists' law, additional funds for the separation barrier and the establishment of a new national emergencies authority. Finally, the treasury says that all other ministries have had their budgets frozen for such increases through 2010.

The treasury did meet most of the demands of the Pensioners over the weekend, including increased old-age pensions, equalization of benefits to widowers and widows in veteran pension funds, lifting of management fees for the veteran funds and discounts for retirees for drugs and for the television license fees. The treasury says the only outstanding issues with the Pensioners relate to health care.