I am honored to submit the proposal for the 2003 state budget and the principles of the Government's economic policy for the coming fiscal year.

Members of the Knesset,

The past two years have been among the most difficult in the history of the global economy, perhaps the most difficult. The upheaval, which began sweeping the economies throughout the world at the end of 2000, is far from over, on the contrary. In many respects 2002 stands out as the year in which the global economic crisis intensified and became more severe.

The American stock exchanges continued - as in the preceding year - its freefall, causing investors to lose billions of dollars and curtailing opportunities for companies to raise crucially-needed capital from the public.

Hi-tech industries, the engine that propelled world economies at the end of the previous century, are still facing the most severe crisis in their history. Talk about imminent recovery remains mere talk, while hundreds of thousands lose jobs, and America's Silicon Valley becomes one of the saddest places on earth.

The financial industry, the leading sector in the US domestic product, is currently under a cloud of suspicion. Every day new inquiries and scandals are revealed, and serve a critical blow to the most important asset of Western economies in general and the American economy in particular: investor confidence.

Latin America is faced with a serial collapse of economies that were an important pillars in the blossoming global economy. The situation in Brazil threatens to sweep the world banking system into an abyss of debts, the scope of which has not been known in the past.

In Europe, the continent that united in order to contend with the large blocs of the US and Japan, the three strongest countries - Germany, France and Italy, and with them Portugal as well - have announced that they are unable to meet the macro-economic demands to which the EU countries are committed.

As to the continuing crisis in Japan there is no need to elaborate. 2002 will go down as yet another difficult year in Japan's economic history.

This is, as defined by one of the economists - a worldwide typhoon.

Members of the Knesset,

About a month ago I returned from meetings with the International Monetary Fund and the World Bank, held in the US. There I met with ministers of finance, governors of central banks, directors of investment houses and commercial banks. I must tell you that what I saw was mainly people who are concerned, expressing grave anxiety about the future of the world economy in the coming years. The optimists among them - and there weren't many - spoke about an anticipated recovery in the world economy only in another year or eighteen months. As I mentioned, these were the most optimistic, and they were few.

The Israeli economy stands the midst of this storm-- a small, developed, knowledge-based economy, but nonetheless small, with a total gross domestic product of $100 billion. This typhoon threatens to wash over our economy and all of us as well.

But in Israel we have other problems too. In addition to world recession, the collapse of the hi-tech sector, and the collapse of capital markets in the US - we face other problems, our own homemade problems, which neither America, Japan, Germany, Italy, nor France have to address.

Members of the Knesset,

The Palestinian war of terrorism ignited by Yasser Arafat and his colleagues two years ago is exacting a high price from us day in and day out, not only in terms of blood, but also in terms of economic resources.
This war, in contrast to other wars we have endured, is not being waged only along the borders, far from home, but throughout Israel, in Tel Aviv and in Tel Romeida, in Netanya and in Nezzarim, everywhere and all the time. This war, in contrast to other wars we have endured, is no swift war, lasting six days or a month or two months. This war has continued for more than two years.

Since the inception of the wave of terror revenues from taxes have fallen by more than NIS 15 billion. Entire industries, such as tourism, have shrunk and regressed several years. Foreign investors, who came in droves during the euphoric times of talk about a New Middle East, now on stand-by. Entertainment and commercial centers are not like they were in the past. Since the onslaught of the wave of terror, the Israeli economy has lost close to 10% of its gross domestic product, some NIS 40 billion.

In other wars, the course followed by the Israeli economy was clear: war - followed by severe economic crisis, from which we emerged years later. This is how it was after the Yom Kipper War and this is how it was after operation 'Peace for Galilee'. We are determined to break this pattern of war followed by financial collapse, at all costs.

Members of the Knesset,

In contrast to other wars we have endured, this war against terror is the first war being waged in era in which Israel has a free, open, and modern economy, that behaves according to the rules set by the global economy. We are far more vulnerable than in the past to market fluctuations and investor activities.

It is for this reason that over the past two years we have set the consolidation of financial stability as the primary objective of economic policy. This strategic approach is by no means trivial. We have seen other countries, where within weeks financial crisis precipitated economic collapse, bringing their citizens to the brink of starvation. We are determined to prevent this kind of crisis at all costs.

In order to preserve stability, we endeavored, first and foremost, to continue working according to the rules of international market economics. Countries whose markets are open to trade and foreign investment, assume the rules of the international game, which requires, first and foremost a reasonable fiscal deficit. This is the reason that we, like any household that has suffered a drop in income - have had to adjust to lower revenues a different rate of expenditures, and to drastic cut-backs in government spending.

In the past two years the government has cut more than NIS 20 billion from its budget, in order to avert a deficit level that could endanger the economy, while meeting the supplements required by the security forces, in order to fight the murderous Palestinian terrorism.

Members of the Knesset,

No item was spared budget cuts. No ministry was immune. No sector was left out of the picture. No sector of the population was exempt from bearing the burden of the war - big and small, rich and poor, veteran and new immigrant.

I confess, the steps we have taken are harsh and painful, but the alternative would have been even harsher and even more painful.

And so, in order to preserve the stability and standing of Israel in international markets, we are determined to meet the deficit target to which we have committed this year - 3.9 % of the GDP. In this regard there cannot be any deviation. We will do our utmost to meet these targets, since we understand the grave implications of failing to do so...

But this is not enough. In order to continue conveying to investors a message of determination and credibility, the government has undertaken to lower the target deficit for 2003 to 3% of the GDP. This decrease is vital to preserve Israel's international standing. This standing is one of our strategic assets here in the Middle East.

Members of the Knesset,

This budget, as I have said, is hard to bear. It is hard for each and every citizen, and it is of course hard for me personally. No finance minister wants to sign off on cut-backs and reductions. I would have preferred to be finance minister during a period of prosperity, and give everyone additional funds. But the truth is that there is nothing to give. And when there is nothing - the truth must be told.

The measures we are taking in the 2003 budget are designed not only to fill the hole in the cash box, but first and foremost to stabilize the economy, to carry out a long series of reforms and structural changes, so that when the world economy finally recovers, the Israeli economy will be in a position to benefit and poised to take off.

The first reform with which we are dealing is the reform in the labor market. We refer here- and every member of the house is aware of it - to a hot potato that the government of Israel has refused to deal with over the years, preferring to pass it from one to the next. The result, economically and socially, has been destructive. The rate of participation in the work force in Israel is the lowest in the western world. In certain respects, if we don't deal with this issue, we could retreat to levels prevalent in third world countries.

It is simply not feasible that there are about a quarter of a million unemployed in the State of Israel, while at the same time, there are even a greater numbers of foreign workers. Here too, in terms of the ratio of foreign workers, Israel is a world leader. To be more precise, we have the dubious distinction of occupying second place. We know exactly who is responsible for ousting these people from the productive labor and forcing them on the dole, to facilitate bringing in foreign workers. These foreign workers do not come here to replace Israeli lawyers, Israeli accountants, Israeli doctors or Israeli engineers. They come to replace the weak sectors of the population, who have neither the voice nor the power to object.

And so, the first step in the framework of the labor market reform is to deal honestly, for the first time, with the issue of foreign workers. The Israeli police, headed by Commissioner Shlomo Aharonisky, has taken on this cardinal national task, and we are already seeing the fruits of this labor. We have allocated the proper financial resources required for that purpose because this government is determined to deal with this problem head-on in order to create job opportunities for Israelis.

True, we have also touched income supplement allowances. We have done this in order to put an end to the absurd situation, whereby someone who sits at home and who is able to work - because we are not talking about those unfortunate individuals who cannot- receives a higher income and benefits than someone who wakes up in the morning to work in a textile factory or a production line, in order to be gainfully employed.
Over the past 10 years, transfer payments have grown, yet the status of the poor has not improved. On the contrary; they have become more deeply entangled in that same poverty trap. Here too, we act out of sensitivity and responsibility and are not changing the allowances of the truly weak populations. People 55 and older who have difficulty integrating in the labor force, the handicapped and the ill, and pensioners receiving basic pensions will continue to receive current allowances.

To encourage recipients of supplemental income to seek employment, we provide incentives for employers to hire those who are able to work, who are fed up with the poverty cycle and have made a rational and logical decision: to go out and earn a respectable living. The government will underwrite one third of the salaries of new employees, who leave the ranks of social security allowances and enter the ranks of the gainfully employed.

I realize that in some places, particularly those far from the center, there is a problem of employment. In order to help those who receive income supplements, a large number of whom reside in the periphery, to find respectable employment, we are increasing the infrastructure budget this year by 20 percent. This comes to an additional NIS 1 billion, and is part of a 5-year plan to double the infrastructure budget.

In parallel with the investment in the infrastructure budget, we are executing a series of projects through project financing that is provided by the business sector. This year contracts have been awarded for desalination of 160 million cubic meters water per year. This past week the government tender committee chose the winning concessionaire in the tender to build and operate the first line of the Jerusalem light railway. Within the next few days the prequalification stage of the groups contending for the Tel Aviv light railway will be concluded. The country is being stretched in all directions by railways and roads, because we are determined to do everything to move this wagon forward.

They say we are crazy. Why touch allowances, if it is possible for one year, only one year, to defer the construction of new roads? Infrastructure has no lobby, and in any event, the ribbon will be cut by someone else. But I say that it is a grave error to sacrifice the long term for the short term. In a period of world recession, of the collapse of hi-tech sectors, Israel has no chance of emerging strong except through massive investments in infrastructure. Infrastructure is perhaps the only sector that can grow in such a difficult year. This will not only catalyze growth, but will also bring the periphery closer to the center of the country.

Members of the Knesset,

All this talk about infrastructure is not just a slogan. Anyone who travels the breadth of the country can see the work in progress, can see that water desalination is no longer just a theoretical subject for newspaper articles, but is taking shape even as we speak. They can see that the light railway in Jerusalem is closer today than ever before. They can see that roads are being paved and railways are being laid all over the country. Because the time has come for the State of Israel to adapt itself to the western world not only in terms of fiscal deficits , but also in terms of transportation infrastructure.

Mr. Chairman,

The second reform that we are talking about is the reform required in the defense budget. There is no dispute that the defense system increased operations over the past two years due to the terror incidents and the threats that surround us. This is the time to convey our blessings and support to the Chief of General Staff, to all the soldiers of the Israel Defense Forces and the people of the homeland security branches , who risk their lives day and night to ensure the security of Israeli citizens . However, even the defense system must understand and internalize the need for sharp and painful budget cuts. We simply have no choice. We already spend close to 20% of the national budget on security-related issues. Nowhere in the western world is there another country that even comes close to these fantastic numbers.

Members of the Knesset,

In 2003 the income tax reform will come into effect. For the first time taxes will be imposed on capital gains, while, at the same time, taxes on labour will be reduced. This reform, which was approved a few months ago in the Knesset, is another sign by the government also to the business sector - but no less to each and every citizen - that the government is pro-enterprise, pro-labour and pro-growth. The income tax reform will divide the burden more equitably, and will favor the strata, which bears most of the burden in Israel - both the economic burden and the security burden - the middle class.
Already in two months time the disposable income of all the wage earners in the economy will increase by 2-4 percent. This is the start of a revolution that sanctifies work and introduces more rationality into the Israeli tax system.

This year's budget is not simple. I am asked what message it brings to the citizens, and I answer that the primary message in this budget is in its candor. This budget that tells the citizens of Israel the truth, and the true is that our current situation is not easy.

I could have come to the Prime Minister and to the ministers with a political budget, since next year will be an election year. I believe, however, that this would border on national irresponsibility. I would like to thank the Prime Minister for the support and backing he has given our measures, and also for opting as we have, for long-term national considerations rather than short-term political considerations.
Today, not only are the eyes of the citizens of Israel cast upon this house. The eyes of foreign investors, of rating agencies, of the markets are evaluating us as we speak. I call on everyone to rise above and forego any other consideration, because the economy must come before politics. This is the reason that we submit an economic budget, and not a political budget to the Knesset. We firmly believe that Israel's economy at this time is more important than any other consideration and the public will know how to chastise those who favor narrow political interests over national interests.

I would like to take advantage of this podium to thank the Prime Minister for the determination, support and personal effort you have invested, to ensure that Israel enters 2003 with a economically sound, comprehensive national, rather than political, budget. For this I reiterate my gratitude.

I hereby appeal to the Knesset to approve in the first reading of the Economics Arrangements Bill (Legislative Amendment for Fiscal and Economic Policy Targets for 2003 - 2003).

Furthermore, I would like to request approval of the first reading of the 2003 National Budget Bill for 2003, and to send it to the Knesset Finance Committee in preparation for its second and third readings.