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Last week, the Knesset approved the first reading of the 2007 state budget with an impressive majority. The finance minister delivered a solemn speech in which he said that despite all the pressures, he will not enlarge the expenditure framework, increase the deficit and impose new taxes. Thus, Finance Minister Abraham Hirchson trapped himself so everyone will know that in the event of any demand for an additional sum, someone will have to give in and cut, because nothing will come out of thin air.

The chairman of Shas, Eli Yishai, hastened to declare that although his party voted in favor of the budget in the government, it will vote against it in the Knesset if the freeze on National Insurance Institute allotments is not canceled. This is a measure that would bring over NIS 600 million in budget savings comprised of two components.

One sum of NIS 350 million derives from the continued temporary order to decrease unemployment, guaranteed income and birth grants by 4 percent. This decrease came into being in 2002 during Silvan Shalom's tenure. Part of this (old-age allotments and nursing care allotments) has already been returned to its previous status.

The other sum, about NIS 300 million, will be saved by a nominal freeze on all NII allotments at their current level. This includes allotments for children, the elderly, widows, survivors, nursing care recipients, those handicapped through Nazi persecution, and bereaved families, as well as for unemployment, guaranteed income and birth grants. This provision values about NIS 300 million. It is somewhat hard to understand why the Finance Ministry decided to impose its burden specifically on the weaker strata, which even without this blow has taken a walloping over the past three years. The child and guaranteed income allotments were cut significantly during those years, with the (correct) aim being to decrease the "encouragement of reproduction" among poor families who will not be able to leave the circle of poverty with eight or 10 children when guaranteed income allotments are larger than the minimum wage, thereby encouraging people to stay home from work. But all this has already been achieved and corrected.

There is also a problem regarding the other allotments. They are especially important to the population's weakest groups, those that are not in the labor market at all, such as the elderly and others who rise above the poverty line with the allotments. Therefore, if Prime Minister Ehud Olmert and Hirchson seriously believe it is necessary to fight poverty, how does this fit in with the allotment cuts?

One must not forget that the allotments are adjusted only in accordance with the rise in the consumer price index. Therefore, during a period of growth like the one we're experiencing now, when wages are rising, profits are growing and the standard of living is increasing, anyone who receives just linkage to the index is, in fact, slipping backward a little. And if this, too, is denied him, where is he going?

But Hirchson is also correct in not being prepared to bust the budget or increase taxes. If so, how can the circle be squared?

There are those who are looking for the solution under the street lamp. They want to postpone the tax reform, even increase income tax and company tax, and fund the allotments with the money that comes in. This would be a mistake, because raising taxes will harm growth and employment and especially hurt the weak.

In the global world, there is no alternative but to compete, prevent brain drain and attract investment, and this is done by lowering taxes. There also shouldn't be a return to increased VAT, because this would directly harm the weak, who spend all their income on immediate consumption. Thus, there's only one answer: a real cut in government expenditure, for example, in two large and important ministries: the Defense Ministry and Education Ministry.

Following the Lebanon war, the Israel Defense Forces received a huge budget addition of NIS 8.2 billion "to renew equipment and stockpiles," and it's demanding another NIS 10 billion. But a well-known rule in management theory is that when a large and convoluted organization receives more money, it's a sure recipe for further degeneration, increased inefficiency, and more convolution. And it's better that the army gets less, because the large sums are going to the wrong places: more fat at the expense of atrophied muscle.

Therefore, it is necessary to demand that the chief of staff immediately submit a comprehensive efficiency plan that includes decreasing the size of the army on the Home Front, reducing command centers, cutting senior rank slots, and canceling delegations abroad and many other provisions that will save billions in the fat and heavy army. And if the chief of staff is incapable of doing this, he should be so kind as to relinquish his place to someone else.

If all this is done, there will be no need to cut even a single shekel from the allotments, and at the same time there will be a better, more muscular and more effective army with fewer snafus.

There's also what to be done at the Education Ministry where many billions are wasted on redundant and superfluous administration and on districts that should have been shut down long ago. Education ministers testify to this the moment they leave their positions. Courage, responsibility and the political willingness to engage in the struggle are all that's needed for Eli Yishai to be right. The allotments should not be harmed. At the same time he should be supporting alternative cuts in the government ministries, because in economics there are no free lunches.