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"The Finance Ministry was right - the defense budget should have been reduced by three billion shekels, not one billion," Bank of Israel Governor David Klein told Haaretz in an interview this weekend.

As he sees it, by reducing the level of cutbacks in defense spending, the Sharon government has brought about the "bad, unbalanced result" of enacting major reductions in social welfare allocations.

The governor indicated that reductions in National Insurance Institute family allowances should, ideally, have been limited to selected population groups. Relating to the across-the-board cut in family allowances, Klein said that "had it been possible to carry out these reductions in a selective manner, it would have been more just."

Klein does not believe the cuts in the defense budget will necessarily impair Israel's response to terror attacks. Major cuts in defense spending, he suggested, can be justified both by changed regional circumstances brought on by Operation Iraqi Freedom, and by alterations in wage and benefit terms given to career army soldiers.

"The defense budget," Klein said, "is not determined solely as a function of the war on terror; that war is only one of its components. There are two other major elements. One is the threat posed to Israel from the east, and this has been significantly reduced, after [the war in] Iraq. The other component is service terms given to soldiers, and here a distinction should have been drawn long ago between combat soldiers and those who support the combat fighters. And when this distinction is drawn, there's room to reduce expenditures to the security system."

Click for full interview in the business section.