The Histadrut labor federation and the treasury are nearing an agreement on a "package deal" for the biennial budget that will be submitted for government approval on Tuesday, Army Radio reported on Monday.

Officials from the labor union, the treasury, and other government ministries held a marathon negotiating session that stretched into Monday morning. All sides reportedly agreed in principle to a number of changes to the arrangements bill.

The government and the Histadrut are also said to be close to a compromise whereby the state budget's expenditures will reach 3 percent while the labor union agrees to a freeze on wages across wide swaths of the public sector, according to Army Radio.

As of Sunday, the differences between the treasury, on the one hand, and the Histadrut labor federation and Defense Ministry on the other over the proposed state budget remained unresolved. Cuts to civil servants' wages are another sticking point.

Analysts have said that Prime Minister Benjamin Netanyahu will have to intervene to break the deadlock before the crucial cabinet meeting on the budget scheduled to take place on Tuesday.

Meanwhile, Finance Minister Yuval Steinitz met Sunday night with Education Minister Gideon Sa'ar to try to reach an agreement on education funding. Sa'ar says the proposed budget includes severe cuts to his ministry's allocations for the year, while Steinitz argues that the education budget has actually increased.

Histadrut chief Ofer Eini and the treasury official responsible for wages, Ilan Levy, held long meetings on Sunday over the severity of cuts to civil servants' salaries.

Also at the meetings was Ori Yogev, senior economic adviser to the prime minister and a former department head at the Finance Ministry's budget section.

Rami Belinkov, the treasury's chief of budgets, and Industry and Trade Minister Benjamin Ben-Eliezer also joined the talks.

The difference between the Histadrut's position and that of the treasury is estimated at between NIS 1 billion and NIS 2 billion. The Finance Ministry is demanding that Eini approve a freeze on wages in the civil service until the end of 2010. The value of such a move is estimated at NIS 3.5 billion per year.

Sources familiar with the matter set the concessions that Eini has made so far at between NIS 1.5 billion and NIS 2.5 billion. So far he has agreed to give up on additional benefits such as rehabilitation and clothing stipends, as well as other minor benefits.

The Finance Ministry is demanding a freeze on salaries, which so far Eini is refusing.

One reason for the talks' slow pace is that the Histadrut is demanding a concession from the treasury for every one it makes.

In return for concessions on civil servants' salaries, Eini wants the privatization of the postal service to stop and legislation on a variety of matters pertaining to unions and which are expected to improve conditions for workers. For example, Eini wants dramatic cuts in the subcontractor status for workers, greater support for workers in areas where exploitation is rife (cleaning and security work), as well as penalties against employers who fail to pay salaries.

The Finance Ministry has agreed to a request not to unite educational television with the main public television channel.

The treasury is also asking the Histadrut for a commitment not to strike in 2009 and 2010, including during the carrying out of changes at the Israel Lands Administration, the ports and the Israel Electric Corporation.

There are also proposals to raise value added tax by 0.5 percent to 16 percent despite Netanyahu's promise that no taxes would be raised. Such a move is expected to be felt mostly by the poor and would add NIS 1.9 billion to the state coffers.

Responding to criticism that it is targeting the poor, the Finance Ministry approved two new taxes yesterday aimed at the wealthy: raising the maximum payments for social security and tax on expensive vehicles.

The president of the Federation of the Israeli Chambers of Commerce, Uriel Lynn, said that "applying showcase taxes will have little contribution to the state coffers. Instead of creating new taxes, it is best to focus on continuing the direct tax reform and to rebuild the tax structure in a fair manner to spread out the burden along various income brackets, especially to improve the situation of those in the lower-medium income brackets, who earn between NIS 4,270 and NIS 16,380."

Meanwhile, local municipalities decided to stop work for two hours on Wednesday to protest against the planned cuts in education. The Tel Aviv municipality has yet to decide whether to join.

Garbage collection as well as services at schools, kindergartens and registry offices will be be unavailable from 8 A.M. to 10 A.M. Traffic lights are also expected to suffer disruptions.