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In December 2002, Israeli democracy went through a watershed experience - for the first time in its history, the defense ministry presented the treasury with its own budget book. Brig. Gen. Muli Ben-Avi prepared the defense ministry budget that contradicted a government decision.

The expenses in this unique budget book were NIS 47 billion for 2003 even though the government had authorized only NIS 42 billion - a NIS 5 billion gap. The mandarins of the defense ministry and the chief of staff had circumvented the government.

Behind the gap is an odd tale worthy of a banana republic. Before the defense ministry budget was handed to the government, Defense Ministry director general Amos Yaron met the prime minister alone and told him there was an understanding with a "friendly country" to give the defense ministry the equivalent of NIS 5 billion during 2003 to pay for some joint military development projects.

Therefore, the defense budget could be increased by NIS 5 billion without any problems, he said. Sharon was enthusiastic about the creative deal and agreed. Silvan Shalom, then finance minister, also immediately agreed. Why make waves before elections.

A few days later it turned out the there was only one element missing from the great package deal - the "friendly country." And so a NIS 5 billion hole appeared in the budget.

When Sharon found there was neither a country nor a friend, he forced the defense ministry to take back its special budget and to hand in one that specified NIS 42 billion. And that's what it did. And just to make sure, Sharon's bureau chief, Dov Weisglass, sent a letter on December 21, 2002 to the defense minister, specifying explicitly that during the first quarter of 2003, the defense establishment could spend only NIS 8 billion.

But January and February went by and the treasury discovered the defense ministry was going to spend NIS 9.1 billion in the first quarter, including both actual payments and commitments.

The IDF returned to work according to the special route it had chosen for itself - NIS 47 billion, not NIS 42 billion, as the government had ordered.

Up to a month or two ago the army conducted business as usual and did not cut anything significant from its budget. But while it made certain to tell the media about some of its plans for the future, it behaved as if nothing happened.

For example, despite talk about extending the term of a career officer beyond the age of 45, the army plans to retire more officers with budgeted pensions this year than in the past. Yaron refuses to appoint a full-time accountant to the office, even though it is the custom in all other ministries, and even though the government made an explicit decision to do so.

And here's another amazing tale - every Israeli resident pays a health tax of 4.8 percent of their wages - except for career soldiers, who pay 2.4 percent.

The government and Knesset decided in the Economic Arrangements Law that health tax for career soldiers would also be 4.8 percent, but the defense ministry simply didn't implement the change. No wonder Netanyahu is mad and won't agree to any change in the decision, nor accept PMO director general Avigdor Yitzhaki's mediation.

Only a month or so ago, the defense ministry realized what was happening and began talking about cut. Payments to suppliers halted, fewer resere call-ups were planned, fewer "white" cars are being bought for officers, and fewer officers are going to university at the army's expense. But that's a drop in the ocean of cuts the army has to go through, both in conditions of service for career soldiers and slowing down development of certain projects.

The treasury now demands that the defense ministry cut NIS 1.5 billion from the budget. But the truth is, it would be ready to accept the initial NIS 5 billion cut. The treasury is even readying for a situation in which the defense ministry cuts NIS 2.8 billion this year, while the rest, NIS 2.2 billion, is spread out over the coming years, since the money in any case is for long range development projects that take years.

The bottom line is that the state faces a brutal NIS 10 billion cut in the 2003 budget. If the army doesn't cut its NIS 5 billion, that means Netanyahu and Sheetrit will have to cut another NIS 5 billion from National Insurance Institute allowances, education, health, welfare and infrastructure.