Israel's Hefty Defense Budget Has High Social Cost

by Ferry Biedermann

The disabled had demonstrated for months earlier until Prime Minister Ariel Sharon intervened in March to raise allowances. The cuts are back, and so are the demonstrators.

Battered by the high cost of fighting the Palestinian uprising, the crisis in the high-tech sector and the general slowdown in global trade, Israel's economy has nose-dived. Belts have been tightened all round -- except on the defense budget.

Finance Minister Silvan Shalom has defended his measures, saying it was a "just division of the burden" and a "clear preference for the middle class who serve in the army." Many of the cuts will hit those who do not serve in the army, such as ultra-orthodox Jewish religious students.

At the best of times Israeli governments have had a tough job reconciling the divergent demands of the many parties that usually make up a coalition. Budget cuts of $2.7 billion proposed earlier were in the end unacceptable to the ultra-orthodox Jewish coalition parties who saw them cut into child benefits and student allowances that are particularly important to their constituents.

They voted against the government and defeated the package when it was first introduced in the Knesset, Israel's parliament. In the blunt style Sharon usually keeps for his military exploits, Sharon fired ministers from those parties. He then marshalled the remaining coalition partners and hammered the measures through parliament in the first round of voting.

Sharon is left with only a nominal majority of 60 in the 120-seat Knesset. Even so, he says he will not let his long-time ultra-orthodox allies back into government unless they vote for the second and third reading of the law necessary to make the budget cuts final. He has initiated moves to bolster his government with the support of two right-wing parties that left the coalition several months ago.

The political crisis can affect the course of the Israeli-Palestinian conflict. Dismissal of the orthodox parties has made Sharon more dependent on the Labor party led by defence minister Benjamin Ben-Eliezer. Eliezer says that now more than ever he would urge the government to begin a political process with the Palestinians.

The Labor leader says he will have to be particularly "responsible" now that the coalition rests on his party's shoulders. His support signals his intention to continue within the coalition and avoid early elections that could be disastrous for the left wing.

The Palestinian intifada has contributed significantly to the downturn. Finance Minister Shalom says his emergency measures became necessary after last month's military offensive put a further strain on the defence budget.

The Bank of Israel says the uprising has directly and indirectly cost more than 3 percent of the country's gross domestic product (GDP). Apart from the increase in defence spending Israel has faced a sharp drop in tourism, reduced consumer spending, dramatically reduced foreign investment and even reduced trade with the Palestinians.

The Israeli economy contracted last year for the first time since 1953. Growth fell 0.6 percent, following a healthy 6.4 percent growth the previous year. Other indicators are equally worrying: unemployment has reached 10 percent in recent months and inflation is threatening to get out of control with a forecast of 8 percent for this year.

Israel's economic woes pale, however, in comparison with the plight of the Palestinians. Their economy, not the strongest to begin with, has been decimated by the conflict. Workers have been unable to get to their jobs in Israel or even in Palestinian cities because of Israeli closures.

Unemployment was said to be 30 percent even before the new Israeli offensive hit their economy. Trade and industrial activity has been seriously hampered by the violence and the travel restrictions. The direct damage to infrastructure, buildings and factories is immense. By some estimates GDP has dropped 50 to 70 percent.

The situation in the Palestinian Authority areas has become so dire that many families cannot provide for themselves any more. Half a million Palestinians were getting basic foodstuffs under the World Food Program this week.

The Palestinians are harder hit, but the political consequences in Israel seem to be greater. The crisis with the orthodox parties shows how difficult it is to satisfy all the parties in the coalition government system. Besides, Israelis have become used to a Western lifestyle they do not want jeopardized.

Israel's economy is firmly anchored in modern industries, particularly the high-tech sector. Tourism, agriculture and U.S. aid also play a role.

Tourism provided 3.5 percent of GDP before the intifada. U.S. aid comes to about $2.8 billion a year. Most of the U.S. support goes into the defence budget, to which Israel dedicates 10 percent of GDP. U.S. civilian aid is to be phased out by 2006.