TEL AVIV – Israel entered 2002 in deep economic crisis and without the budget the Knesset should have adopted by Dec. 31. Though the budget sponsored by Prime Minister Ariel Sharon will probably pass with minor changes before the March 31 deadline, the underlying economic crisis will remain serious.

Last month, Finance Minister Silwan Shalom, backed by Sharon and the conservative right-wing majority in the cabinet, decided to cut 6.3 billion Israeli shekels (ILS) (about $1.5 billion) from the ILS 225 billion budget for 2002 that was passed earlier by the Knesset in a first reading.

The Shalom-Sharon team has called for slashing national insurance subsidies for pensioners, social welfare and health services, while stubbornly rejecting any thought of taxing the huge profits of stock exchange profiteers and big banking trusts.

The ultra-orthodox clerical Shas and part of the Labor faction have announced they will not vote for the proposal because most of the burden of the cuts, and therefore fighting the recession, would fall onto the shoulders of the poor.

Nationally, 17 percent of Israeli families live below the official poverty line. Hardest hit by extreme poverty are the one million Arab Israelis and the residents of the so-called development areas and towns in the southern Negev and northern Galilee districts, the latter majority-Arab in population.

Official unemployment rose from 7.1 percent in January 2001 to almost 9.8 percent in December. However, to the 235,000 unemployed registered with the labor exchanges must be added tens of thousands who have stopped going there.

Unemployment hits the “development” areas extremely hard. Many of the enterprises that started up with big government subsidies have closed, only to reopen in other countries, such as Egypt, Jordan and Kuwait, where wages are even lower.

In 2001, the Gross Domestic Product dropped by 0.5 percent and per capita production shrunk by 2.9 percent. The finance ministry’s 2002 economic plan predicts deepening recession, but promises everything will be done to turn things around in 2003.

At the start of this year, the National Bank lowered the basic interest rate by 2 percent. This has already caused the ILS to fall at least 12 percent in relation to the U.S. dollar and the euro, thus setting the stage for rising prices and a drastic decrease in the real value of wages and salaries.

The government also wants to cancel the tax reductions for residents of the Negev “development” district, introduced some 40 years ago as an incentive to settlement. The Negev residents are fighting this with massive daily protest actions, blocking traffic for hours on area highways and railway lines.

Significantly, most Negev protests highlight the fact that the government has no intention to cut or cancel the huge subsidies and tax exemptions granted the colonial settlers in the occupied territories. Increasingly, the economic misery of the poor, as well as large sections of the middle class, is being blamed on the government’s security policy – increased military involvement in the occupied territories and preparations for a wider war.