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Finance Minister Benjamin Netanyahu believes that completion of the separation fence will help bring about an economic recovery, and he suggested yesterday that money for its construction can come from reassessing the defense budget.

"By redefining the threats, resources can be saved from the defense budget; and some of the resources that are saved can be redirected for the purpose of building the separation fence," Netanyahu said, in a call to the government to accelerate the fence's construction.

"The security problem has changed," Netanyahu said. "The Iraqi threat has been removed, and consequently, the threat of a western front with Egypt has diminished. The significance of this is that the threat of a military invasion of Israel, the principal threat with which the defense establishment has had to cop with throughout the years, has almost disappeared. Israel remains under threat primarily from terror attacks and ground missiles. The geopolitical change in the threats to Israel must find expression in the defense budget."

The finance minister revealed that the treasury wants the defense budget to stand at NIS 30.5 billion - 10 percent less than the Defense Ministry's NIS 34 billion annual budget between 1996-2000. The defense establishment, meanwhile, is demanding a NIS 36 billion budget, the same figure it requested in 2002 and 2003.

The increase in the defense budget in recent years stemmed from the Israel Defense Forces' withdrawal from Lebanon, which required a budget supplement of NIS 1 billion; the outbreak of the intifada, for which the Defense Ministry requested a NIS 1.3 billion addition; and the Iraqi threat, Netanyahu said. In March, due to the continuing intifada and concerns about an Iraqi attack on Israel, the defense establishment and Prime Minister Ariel Sharon agreed on a NIS 33.75 billion budget.

Following the removal of the Iraqi threat and an end to expenses related to the withdrawal from Lebanon, Netanyahu sees no reason not to decrease the defense budget. "If at the end of the 1990s, when the army was preparing for an Iraqi attack, it sufficed with a budget of NIS 34 billion, there is no reason why today - with the entire addition required for the intifada amounting to NIS 1.3 billion - it cannot suffice with less," he said.

Netanyahu said the army's reorganization based on new threats, together with its expected streamlining, could facilitate a 10 percent cut in its budget.

The Finance Ministry's proposed defense budget of NIS 30.5 billion includes an investment of NIS 500,000-700,000 in the construction of the separation fence. The treasury, nevertheless, is willing to grant the army a budgetary supplement for accelerating the fence's construction. Netanyahu sees the fence as a solution to the problem of suicide attacks and, consequently, a means to boost economic growth.

"Without stabilizing the security situation, we won't recover economically," Netanyahu said. "Security stabilization, namely neutralizing the weapon of suicide terrorists, depends on us and construction of the fence. Therefore, I am calling on the government to take a decision to speed up construction of the fence. There is a need for dozens of teams to work simultaneously until its completed. The budgetary issue will not get in the way of accelerating the fence's completion. Already yesterday, we budgeted NIS 500 million to speed up [construction of] the fence; and if necessary, we will budget more."

Netanyahu refused to say which other budgets will be affected by the fence's completion. He said, however, that the United States would not prevent the fence's completion.

Once completed, the security uncertainty would be neutralized and lead to economic growth, the finance minister said. This scenario also serves as the premise for the predicted 2.5 percent growth upon which the 2004 budget is based. Netanyahu rejected the Bank of Israel's criticism that this was an unreasonable growth assumption and would lead to overstepping the 4 percent deficit target in 2004.

The treasury did not commit itself to a deficit target in 2003 - the deficit this year is likely to approach 6 percent - because it was unable to estimate income from taxes, Netanyahu said. The 4 percent deficit target in the 2004 draft budget appears attainable, Netanyahu said.

Nevertheless, in order to boost flexibility in the government's policy, the treasury proposes committing a government expenditure target and setting a 3 percent deficit ceiling. "The aim is to get to an even lower deficit over the years; but in order for us not to cut too much in tough years - due to the demand to go down to a deficit of 0 percent - we are leaving leeway to reach a deficit of up to 3 percent," Netanyahu said.

With regard to the budgetary plan, Netanyahu said some steps could be taken to encourage investment - determining a maximum tax of 10 percent for factories in remote areas and granting an exemption from tax on dividends for multinational companies that set up factories in the periphery. He added that there is a need to break the country's monopolies, noting that the economy was losing significant GNP each year due to the lack of efficiency stemming from these companies.