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The 2007 cabinet decision to promote a multi-year plan for welfare, infrastructure, defense and social spending is likely to expose the economy to financial dangers, to stop Israel economic and fiscal measures from reaching the norms of developed nations and will increase the interest payment burden in coming years. These are some of the conclusions of the Bank of Israel's 2007 annual report, which will be released on Tuesday.

According to the report, the multi-year budget plan contradicts the 2005 law limiting annual increases in government expenditures to only 1.7%. If the multiyear plan takes effect, government spending will have to rise an average of 4% a year from 2009 to 2012. Non-defense spending will rise 4.6% per year, and the 2009 budget deficit will be over 2% of GDP - and increase in following years.

Other implications are a rise in public spending compared to private expenditure, though the debt to GDP ratio will still drop, but after 2012 the debt ratio will again rise if the treasury's proposed tax reduction framework is implemented. In order to increase defense, infrastructure and social spending all at the same time by 4%, the state will have to make massive cuts elsewhere to stay within the budgetary framework - or if not, it will then have to raise spending above the legal ceiling and increase the deficit.

The central bank said it was important for the cabinet to explain as soon as possible how it intends to reconcile this contradiction, and restore faith in its ability to meet its fiscal targets.

If the state keeps to the 1.7% annual increase limit in spending, the debt to GDP ratio will drop from 80% in 2007 to 68% in 2012, and to under 60% in 2015. Israel would then meet the EU's debt targets.

However, the central bank says that keeping to this limit would not allow non-defense spending to match the rate of population growth through 2012.