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Israel's budget deficit will grow this year by NIS 2.5-3 billion as a result of the compensation payments made to residents of the North for damage during the Lebanon war. A decision was made at the end of a series of discussions in the Finance Ministry relating to the accounting methods, which will be applied to the Israel Tax Authority (ITA) Compensation Fund.

The decision was to account for the Compensation Fund as part of regular tax revenues. Given this year's large payments, this means a rise in the deficit for 2006, which has already been taken into account in the treasury's new budget forecast.

The drop in tax revenues for 2006 will be NIS 3 billion, - the amount, which will be paid to residents of the North.

From 2007 and on, annual tax revenues will be reduced by about half a billion shekels, which will then be transfered to the fund.

In practice, the money will not be transfered, but the treasury will only record the figures for accounting purposes. However, the major change is that from now on, the compensation funds will be accounted for accurately - and this accounting will be recorded in tax revenues and the budget deficit.

This finally solves an ongoing dispute in the treasury as to how to account for the money in the Compensation Fund. It turns out that for years the money was never actually transfered to the fund; while at the same time no official accounting was ever made for the fund's expenses or revenues.

It turns out that the money marked for the fund had been counted twice. First, as state tax revenues; and later as money belonging to the Compensation Fund.

Before the Lebanon war started in July, the double accounting reached NIS 3.5 billion.

As a result of the compensation payments for the war, the problem of accounting for the money appeared. As a result, a fight broke out between the Budgets Division and the Accountant General's Office in the treasury over how to account for the payments and fund.

The solution is to make a one-time write-down of NIS 2.5-3.0 billion for the value of the fund and its payments; and to account for the fund properly in future years.

The treasury now estimates compensation payments at NIS 500 million to NIS 1 billion less than the original forecast of NIS 3.5 billion. This will leave a theoretical surplus in the fund. The ministry has no plans to add money to the fund, since it will grow by NIS 500 million a year from tax revenues.

In any case, the treasury emphasized there was no relation between the amount of money in the fund and the state's obligation to make legal compensation when necessary.