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Budgetary deficits come and go according to seasons. The first few months of the year are traditionally the best, so that up until June the cumulative deficit is marginal. It is only in the second half of the year that the annual deficit begins to take shape. Even in a bad fiscal year such as 2002, the government chalked up a budgetary surplus of NIS 1.7 billion in January and NIS 1.5 billion in February.

This is why the large deficit this January is so alarming. It states loud and clear that we are marching along a treacherous path of a growing deficit, far beyond that planned for in the budget (3 percent of GDP), and that this could turn into an economic and financial crisis if it is not halted in the very near future.

The large deficit stems from the drastic and unplanned cut in tax revenues as a result of the deepening recession, and from the immense increase in defense expenditure that was caused by funding the ongoing war against terrorism and the preparations for the war in Iraq. The large deficit is also the result of the acrobatics performed by the Finance Ministry toward the end of 2002 when it deferred payments for various expenses while the ministries held back payments to suppliers, and the tax authority deferred VAT and tax refunds from December to January - in order to present an image of maintaining the budgetary target for 2002 - for the benefit of the election campaign.

But now the painful truth is out, and an economist from Fitch, the international ratings agency, was quick to react yesterday. If there are no signs of a diminishing deficit, Fitch will downgrade Israel's credit rating, he said. If the deficit reaches a level of 6-7 percent, as seems likely from January's data, Fitch will be hard-pressed to leave the present rating in place, he added.

The statement about the large deficit yesterday led to a sharp depreciation of the shekel and historic lows on the stock exchange. It is clear to all that because of the large deficit, the government will be obliged to raise a great deal of capital so that the pressure on the capital market will increase and consequently the long-term interest rate will go up and the short-term interest rate will not be able to drop - all of which is bad news for the business sector.

There was a plethora of bad news yesterday, in addition to the deficit: tax income from imported goods plummeted by 45 percent; the average wage dropped by 5.5 percent; sales of new apartments fell by 18 percent; and foreign investments shrank by 30 percent in 2002. And the Finance Ministry is planning to dismiss 30,000 employees from the public sector - 5 percent of its current manpower - and to cut the wages of the remainder by 8 percent, in order to save the budget.

The layoffs and the salary cuts are part of an economy plan in which the treasury intends to cut some NIS 7-9 billion immediately, but this sum apparently will not suffice, particularly since the defense establishment is demanding a NIS 5 billion increase in its budget, otherwise it will not be able to meet its objectives.

There are those who believe that it is not imperative to cut so deeply into the flesh because of the recession, and that it is possible to increase the deficit somewhat, let's say to about 4-5 percent of GDP. But in our peculiar situation, this too is impossible. For as soon as the government decides to increase the deficit and dares to go beyond the stated 3 percent, the public will lose what little faith it has left, will sell bonds and buy dollars, sending long-term interest rates up, impacting on the short-term interest rate, too. The sharp devaluation in the shekel that will follow will bring such inflation and financial disaster in its wake that the crisis of June 2002 will seem like child's play in comparison.

If we add to this the threats to downgrade Israel's credit rating, it becomes clear why the government has lost all fiscal flexibility.

We can expect a series of particularly painful cuts: closing of ministries, dismissals. But the most grotesque aspect is that there is no government and no Knesset to present the planned cuts to. The economy cannot wait 42 days for a government and it is imperative that one be formed immediately, otherwise we can expect a terrible crisis at any moment.