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Israel attempts to balance the books.

Front of house, Israeli politicians talk of the country's vibrant economy as a hard act to follow, but backstage the true picture is different--an economy being drained by the mounting cost of occupying the Palestinian Territories. As settlements expand to the east of the Green Line, poverty, unemployment and budget deficits grow to the west of it, creating an internal socioeconomic apartheid Israel struggles to keep hidden.

On the world stage, Israel puts on a show of seeming economic strength--on the surface, the economy looks prosperous--the Tel Aviv stock exchange is buoyant, macroeconomic indicators appear to be good in terms of per-capita GDP, low inflation, and an allegedly balanced government budget. Yet the Knesset spends some $9.3bn a year to maintain the occupation, whilst annual US aid to Israel has slumped to barely $2bn. At the current rate of increase of the Israeli budget (about 1.7% annually) and the rate of increase of occupation costs (around 8% annually), the cost of the occupation of the Palestinian Territories and East Jerusalem will reach 50% of the total state budget by 2030. Poverty and social deprivation is rising, and Israeli companies are finding it increasingly difficult to attract and secure international funding owing to the increasing pressure of boycotts, divestment and sanctions and anti-Zionist lobby groups overseas. Figures show the occupation is now costing some 13% of the Israeli government's total annual budget--to the mounting detriment of Israeli society.

Diminished budgets

The starkest effect of the cost of occupation is the expanding settlements. And to pay for this expansion has required an almost alcoholic budgetary obsession to claw funds from across the Israeli economy at the expense of poor and underprivileged Israelis. The biggest casualty thus far has been the almost complete dismantling of the Israeli welfare state in order to fuel settlement expansion and to pay for the financially cosseted life of the settlers themselves. The cost of the ideological imperative of anchoring the settlements socially and economically into the Occupied West Bank and East Jerusalem, making them part of Israel, runs at some $3bn a year. Accurate figures are however almost impossible to elicit because direct information is not openly declared; most reporting on occupation costs must fall back on extrapolated figures.

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What is however clear, is that Israel has stripped out its education, health and welfare budgets in order to pay for investment of schools within the settlement blocks. Having to pay incentives to encourage teachers to work in the settlements--'free' school transport, new builds, security costs for the isolated school--all add over 1.3bn New Israeli Shekels ($350m) to the bill. In terms of settler health care, some NIS2bn ($540m) is being spent on ensuring that there is a clinic for every 100 settlers, far above the ratio inside Israel. Incentives have to be paid to attract medical staff operating inside the settlements, thus further draining staff available to treat patients west of the Green Line.

Turning to housing benefits, the state subsidises the cost of a settlement house by 50% and further incentives are offered in terms of low-interest mortgages, and utilities subsidies--all to encourage an increase in the settler population. Tax benefits for settlers come in three forms. The first is extensive discounts on municipal taxes; the second is various tax benefits for businesses within the settlements; and the third is discounts in direct taxes, mainly income tax. Funding to municipalities inside Israel, on the other hand, has been cut by 8% a year since 2004, whereas the funding for settler municipalities has increased by some 14% a year. Taking all of this together means that settlements receive more than double the equivalent per capita funding compared with municipalities within the Green Line.

Whilst settlers enjoy a heavily-subsidised standard of living, those within Israel paying for it, do not. Given that state receipts from tourism, trade and investment are waning, the state has had to privatise government companies, delay promised minimum wage increases, cut welfare payments such as income assurance, senior citizen and child benefits, withhold unemployment benefit from those under 28, and close down vocational training centres. The effects of this are monitored by the Israeli National Insurance Institute and Employment Service, whose statistical reports show that there has been an inexorable rise in unemployment, exacerbated by the reduction in tourism since Israeli military operations in Gaza, as well as a sharp rise in the number of families living below the poverty line (see 'Economic and social indicators' in the panel).

In its administration of the Palestinian territories, Israel only provides for the settler population and its municipal, health, welfare and business needs. Israel does not provide any infrastructural or societal support to the Palestinians by way of education, health or welfare provision. Almost all of this is funded and provided by international donors such as UNRWA, the World Food Programme, the EU and overseas government programmes, such as those sponsored and paid for by the UK's Department for International Development, and international NGOs. As the official currency in the Occupied Territories is the New Israeli Shekel (NIS), all international aid money coming into the Territories must be exchanged into NIS. The Israeli Central Bank writes off the currency of donor exchange as an export. It can do so because under the Paris Accords all donor organisations are obliged to buy goods and services, to aid the Palestinians, from Israeli sources. Cheap food from neighbouring countries such as Egypt or Jordan attracts Israeli customs charges of between 10 and 30% on each product.

Sanctions and boycotts

Israel's imports have for many years exceeded its exports (mostly comprising military equipment, diamonds and pesticides) in per capita terms, and its economy is heavily reliant on the recognition and support of the international community to maintain its balance of payments. The EU is one of Israel's critical trading partners, in that almost a third of Israeli exports go to EU countries. Under the--for Israel--highly favourable and lucrative trade Association Agreement with the EU, Israeli exports may enter the EU free of any tariffs, taxes, charges or fees. However, the emerging boycott movements in Europe are causing the Israeli Manufacturers Association and the Israel Export Institute to feel increasingly edgy. They report that 10% of members lost orders this year owing to the 'Gaza Factor' and that a further 21% had felt a drop in demand from northern EU countries owing to the growing 'Boycott, Divestment and Sanctions' (BDS) movement. The Israeli financial press has been openly reporting on the adverse effects on Israeli businesses. On 31 August 2009, Lev Leviev announced that his company Africa-Israel, heavily involved in construction projects in the settlements, would be unable to meet its financial obligations of dealing with a debt of some 1.4bn [euro] ($2.1bn). Veolia and Unilever have also pulled out of projects in the Occupied Territories and East Jerusalem, owing to a fall-off of international support following the Gaza incursions.

So Israel has to keep robbing the domestic welfare state budgets to finance settlement expansion (and keep a coalition government from fragmenting) on the one hand, whilst trying to placate an increasingly disenfranchised internal population on the other. And with national and international income and receipts failing to cover the increasingly rapacious occupation costs, something has to give. It won't be international talks that will bring Israel to seek peace, but lack of money. Hopefully before Israel's economic house of cards collapses.

Economic and social indicators 2008-9

* National GDP fell 3.6% in the first quarter of 2009; business GDP by an annualised 4.2%.

* As at August 2009, imports exceeded exports, causing a trade deficit of some $1.2bn.

* Exports fell by 6.4%, imports of raw materials fell by 11.3%, and trade and services income fell by 8.4% compared with 2008.

* The 'Gaza factor' caused tourism to drop by 24.7% from January to August 2009.

* Unemployment rose to 7.9% during the first quarter of 2009 and is expected to climb to 10% by the end of the year, as the drop in tourism causes further domestic service sector job losses.

* The number of working families below the poverty line rose from 45.7% in 2007 to over 65% in 2008.

* Of the 2.1m households in Israel, 1 in 4 Israelis--1.6m people--live below the poverty line, with one third of Israeli children living in poverty-stricken families.

* One third of all poor families in Israel are Israeli Arabs, with 60% of all Arab children in Israel living below the poverty line.

Data taken from the Israeli Central Bureau of Statistics, the food and aid organisation LATET, the Israeli National Insurance Institute, the Israeli Employment Service and Mossawa reports 2008-2009
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Title Annotation:CURRENT AFFAIRS: ISRAEL ECONOMY
Author:Small, Peter
Publication:The Middle East
Geographic Code:7ISRA
Date:Nov 1, 2009
Words:1451
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