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Israel's economic edge evaporating

Soaring military spending is partially to blame for Israel's current budget shortfalls  

By CNN's Rachel Brown

JERUSALEM (CNN) -- Military action couldn't have come at a worse time for Israel's economy.

The country's high-tech industry was initially hit by the Nasdaq's decline. And then the rest of the economy suffered as the global slowdown took hold.

"At first it looked like the downturn was confined to tourism, exports to the West Bank, agriculture and construction -- which are dependent on Palestinian labor," says Rueben Gronau of Hebrew University.

"But over time, particularly in recent months, we have noticed that the effect is much more widespread."

The high-tech industry decline is felt especially keenly. Communication and computer-related products make up 51 percent of Israel's total industrial exports.

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But the problems plaguing the global tech world are also at play here.

"Don't forget, this is an industry which exports most of its output, therefore it is more dependent on the state of demand outside of Israel, and not the ongoing political situation here," says Toby Fischbein of Lehman Brothers.

The government doesn't have many options; Israel already has one of the highest tax rates in the world.

Still, the finance minister is proposing hiking the value added tax and cutting welfare benefits. Both are controversial to influential sections of the population.

"In Israel, low income per capita is associated with large families, and large families are centered in two groups: the Arab population and the ultra-Orthodox. Both groups are well represented in parliament and will put up a great fight against this outcome," says Fischbein.

Soaring military spending is partially to blame for the budget shortfalls.

The relative peace over the previous seven or eight years has allowed the government to pour money into social programs -- an advantage that has now evaporated.




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