Silvan Shalom's budget is becalmed

Some economists are already predicting that the 2002 deficit could be as bad as that recorded in 2001.

Finance Minister Silvan Shalom, also from Ariel Sharon's Likud party, only admitted in December that the government's 2.4% target was impossible, given that it was based on predictions of 4% growth for 2002.

Israel's economy shrank 0.5% in 2001 after growing 6.4% the year before - a 2.9% slide in per capita GDP when population growth is taken into account.

This was the first contraction since 1953.

Meanwhile, unemployment looks set to top 10% within a few months.

Deadlock

The budget was meant to be passed by the Knesset, or parliament, by the end of December.

But disagreements between the ultra-Orthodox parties and the Labor party, which have joined the ruling Likud party in a national unity coalition, made that impossible.

Ariel Sharon: likely to back Orthodox parties in cabinet spat

The problem is that while a 24 December cabinet meeting produced agreement on a 6.15bn shekel cut to 254.8bn shekels, no-one is prepared to give up their own agenda - and Israel's electoral system leaves small parties with the balance of power.

For the right-wing, ultra-Orthodox Shas and UTJ parties, that means 500m shekels in new money for families with more than five children, the bulk of whom come from the Orthodox community.

For Labor, job creation measures are sacrosanct - as is the 750m shekel Negev Law, which gives tax breaks and support to inhabitants of the barren and underdeveloped desert in the south of the country.

Taking sides

Mr Sharon has suggested cutting both programmes back to just 250m shekels.

But neither side will budge, although Labor has said that it might consider the move if Likud will scrap tax breaks for Israeli settlers on Palestinian land.

The Shas interior minister, Eli Yishai, has threatened to pull out of the government unless his party gets its way.

The religious parties remain closer to Mr Sharon's Likud than the party's traditional opponent, Labor, and observers believe Mr Sharon is ready to make a deal with Shas and UTJ which could not only rescind the large family cutbacks but increase the budget for the four ministries Shas controls.

That could bring the coalition down, and would certainly mean swinging cutbacks on Labor policy priorities.

But if the budget is not passed by the end of March - and for the moment, Israeli law means that the government is working on last year's spending plans - the Knesset will have to be dissolved and new elections held anyway.