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The Finance Ministry's accountant general, Shuki Oren, has warned the government against increasing the budget deficit, which will result in an increase in Israel's national debt.

Big deficits planned for 2009-2010 could jack up interest rates, increasing the state's financing costs by NIS 4.5 billion a year, he said.

In a letter to cabinet secretary Zvi Hauser, Oren detailed the risks that the state and economy will incur by increasing the deficit. Oren estimated that deficits of 6% and 5.5% for the years 2009 and 2010 will require Israel to raise NIS 80 billion in financing through the issue of bond debt - NIS 60 billion by the end of 2010.

Such extensive financing through bonds is unprecedented, and "will have a very negative impact on the government's financing costs and on the financial risks that it is facing, in addition to the negative impact on the entire economy," Oren wrote.

Increasing Israel's debt will also negatively impact its fiscal credibility, Oren said. He assessed that the move would have a direct impact on yields that the state will have to pay on its bonds. He recalled that at the peak of the crisis in 2002, yields on fixed-income bonds crested at 12%.

Oren pointed out that government bond yields are already on the rise. Ten-year shekel bonds have already risen from 4.4% to 5.25% in the space of a few weeks.

Increasing bond debt will lead to an increase in the government's interest expenses. Every 1% increase in the budget deficit increases interest expenses by NIS 350 million annually, Oren said, and the increased deficits that are expected over the next two years will increase the government's financing costs to NIS 4.5 billion annually.