The report on the war on poverty that was released last week by the governor of the Bank of Israel may contain nothing new or revolutionary but it is nevertheless significant, by virtue of raising the subject. A debate will be held on the subject this afternoon at the Caesarea Conference in Jerusalem, with the participation of Minister Meir Sheetrit, President of the Manufacturers' Association Oded Tirah, and Histadrut Chairman Amir Peretz. A lively exchange of views can be expected.

Poverty and the gap in income between rich and poor have become points of passionate public debate in the past three years, in the wake of the severe economic crisis that led to a rise in unemployment and compelled former finance minister Silvan Shalom, and Benjamin Netanyahu after him, to cut back on child allowances and income supplements. But the seeds of the crisis were sown many years ago.

The watershed was 1973. Until the Yom Kippur War, the economy grew at a rapid pace, the rate of participation in the labor force was high, there was no such thing as income supplements - in which the working poor received financial stipends to stay above the poverty line - unemployment rates were low and the gaps between rich and poor were not especially wide. In addition, the achievements of the Israeli education system and its ranking among other countries of the world were higher than at present.

Until 1975, there were no child allowances. You had to be employed in order to receive tax credit points, which were allocated according to the number of children in the family - a system that clearly encouraged citizens to join the labor force. At the time, Israel did not have 300,000 foreign workers, but 100,000 Palestinian workers.

After the war, strong voices began to be heard, calling for an improvement in the situation of the weaker classes, with the inner-city Black Panthers leading the struggle. But instead of devoting genuine effort to raising the level of education in low-income neighborhoods and development towns, instead of investing resources in providing vocational training for adults, and in transportation infrastructures that would bring the periphery closer to the center, the government chose the quick, easy way: increasing National Insurance allowances.

Since the early 1980s, National Insurance Institute allowances have expanded by astounding rates. In 1980 they totaled NIS 10.7 billion, or 6.1 percent of the GDP, and that figure ballooned by 2003 to NIS 40.5 billion, or 8.9 percent of the GDP. In 1980, only 10,000 families received income supplements; by 2003 that number had reached 160,000. Those who did not enlist in the army could already start receiving income supplements at age 18.

The same thing happened with child allowances that were introduced in 1975: since then, the Haredim have worked to have them increased so that large families would reap maximum benefit. The extension of child-allowance benefits reached its peak in 2001, when families began to receive NIS 885 per month for their fifth child, and every child thereafter. This provided an incentive for having larger families, non-participation in the labor force, and a life of poverty.

Over the years the income-supplement allocations grew, and in 2003 - before that year's cutbacks - it exceeded the minimum wage, and this did not include additional benefits that were bestowed on income-supplement recipients such as rent subsidies, property-tax discounts, discounts on public transport, discounts on kindergarten tuition, etc. Why should a person work?

In addition to the increased National Insurance allowances, the government made a serious socioeconomic error in 1994 when it yielded to pressure from the farmers, industrialists and contractors, and threw open the gates of the country to foreign workers, essentially without restriction. The result was that Israeli blue collar workers were pushed aside, their wages dropped, and they were essentially thrown out of the labor market - and into National Insurance allowances, and poverty.

In order to solve the problem of poverty and the gaps in income, we have to shift into reverse: continue reducing the number of foreign workers, not to raise once again the allowances for those old enough to work, reduce income tax in order to encourage people to work, increase spending on job training for adults, and increase investment in transportation infrastructure in order to bring the Negev and Galilee closer to the center of the country. Most important of all: implement the education revolution that is so acutely needed, because without education and knowledge, no one has a chance of leaving the circle of poverty.