The Bottom Line / Economy at War

One bundle of bad news follows hard on the heels of another, and economic doomsters vie with one another for who can forecast the worst scenario for 2002.

One bundle of bad news follows hard on the heels of another, and economic doomsters vie with one another for who can forecast the worst scenario for 2002.

The Federation of Israeli Chambers of Commerce expects growth of 0.5 percent, Bank Hapoalim talks of only 0 percent but the manufacturers top the lot and announce an economy shrinking by 1-2 percent - which means GDP per head falling by 4 percent.

Joining these worrying figures on the depth of the recession comes falling imports of cars and driers, vanished tourists, the start of boycotts on Israeli products in some European countries, the increased budget deficit for March after increased defense expenditures, and the fall in tax revenues.

Treasury estimates point to the drop in tax revenues growing further this year, which is likely to push the budget deficit to between 5-6 percent of GDP. Now that is really dangerous. As if that wasn't enough, Saddam Hussein yesterday announced Iraq would stop exporting oil for a month, which sent the price up to $27 a barrel - and the Americans are not happy.

In such an emergency situation, the government should take immediate economic steps built on specific criteria:

l Cutting the budget deficit. This is imperative given the depth of the recession and the drop in tax revenues. A state whose budget deficit exceeds 3 percent of GDP is a leprous state.

l Canceling private legislation. This is the correct way to slash NIS 2 billion - canceling the Large Families Law, the Negev Law and the law that grants tax breaks to residents of the territories.

l Freezing public sector wages. Every year in the public sector, wages automatically rise by 3 percent due to promotions and seniority pay. This year, given the emergency, wages should be frozen, thereby saving NIS 2 billion from the state budget.

l Foreign workers. In the past year and a half, 86,000 Palestinians left the Israeli economy. They were replaced with around 52,000 Israelis and 34,000 foreigners. Now the only way to cut unemployment is by reducing the numbers of foreign workers.

l Reforms. In order to save the economy from its woes, a string of reforms that would promote growth and employment should be implemented. For example, building the Jubilee Port, splitting up the Oil Refineries company, separating the banks and the provident funds, comprehensive reforms of the pension funds including their capital market expenses and appointing registered managers to deal with their threatening deficits.

On the one hand you cannot envy Finance Minister Silvan Shalom caught in the difficult military situation, which directly cripples the operating of the economy. But on the other hand there is no pitying him either, because the Sharon government has only put into effect Shalom's own world view.

He has supported expansion of the settlements for years and he currently favors the military solution - a war - including Arafat's expulsion. Reality will soon teach him there is a heavy economic and social price to be paid for brandishing the sword.