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A few days ago the Finance Ministry received a message from the Americans, which said that the U.S. administration was adamant that Israel should not exceed its budget deficit of 3 percent of GDP for 2003, and that it should carry out significant privatizations in the economy - as a primary condition for discussing the schnorrer's package: $8 billion in loan guarantees and $1-2 billion in aid for "preparations for a war in Iraq". There is a question mark over the whole package as the Americans have their own budget deficit, and the U.S. administration and Congress are not happy with Israeli policy in the territories and over the settlements. So it is not definite that the U.S. administration will add the aid into the special law for financing the Iraq war. If it doesn't, then the security situation as well as our economic situation too will be a lot worse than it is today.

The Americans demanded that Israel supply a documented economic commitment as a precondition for dealing with the grant request. On Tuesday February 25, two days before the new government was sworn in, outgoing finance minister Silvan Shalom met with Prime Minister Ariel Sharon to discuss the document. The meeting was tense. Shalom was pondering his own fate and Sharon's ingratitude, as by then he was already aware that he was not to be the next finance minister and might be out of the cabinet altogether.

They eventually agreed to a one-page, eight-point document, which is still the plank of the government's economic program. These points are published here for the first time: contraction of the budget by 2-3 percent of GDP, which is equivalent to NIS 10-15 billion; reduction in labor costs in the public sector (by cutting wages and not dismissing staff, which Shalom opposed); cuts in National Insurance Institute welfare payments; structural reforms in the capital market, such as freeing the pension funds; privatization of state-owned companies; structural reforms in the economy and introducing competition into fields dominated by the government, such as electricity and the ports authority.

Shalom wanted to add two more points, but was eventually persuaded not to. One of his points was a reduction in taxes, the other was investing in infrastructure. The two were left out so as not to rile the Americans who could claim that they are not prepared to finance a raise in our standard of living, such as cutting taxes and building roads, when they are cutting back budgets in the U.S.

Prime Minister's Bureau director-general Dov Weisglass wanted the treasury director-general Ohad Marani to fly to Washington especially to deliver the one-page document personally to the White House, but Marani managed to convince the others that a fax would suffice. So it was faxed the same day.

Finance Minister Benjamin Netanyahu has slightly different thoughts on the economic plan and on the letter. In any case, he spoke this week with Condoleezza Rice, National Security Advisor, and tried to advance the cause of the schnorrer's package. He knows how difficult it is going to be if we don't get those extra billions.