Binyamin Netanyahu and Ariel Sharon ponder Israel's economy

Government revenues are down 9% year on year, with the economy on the verge of its third year in recession, and spending is increasing to cope with security costs.

In February the budget deficit soared to 2.8bn shekel (�366m; $580m), a record for any single month and twice the official target.

During the first eight weeks of 2003 the government has already spent one-third of the budget deficit allowed for the full year.

"The deficit is exceptional compared to previous years", admitted Meir Sheetrit, a junior minister at the finance ministry.

Radical tax cuts?

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Last year Israel's economy shrank by 1.1%, while unemployment was stuck at well over 10%.

Prime Minister Ariel Sharon has promised that his new government will finally manage to deliver stability and a return to economic growth.

However, the government has yet to outline the details of its promised emergency budget.

Israeli newspapers have been full of speculation on plans to raise certain taxes, cut public service salaries and abolish tax exemptions.

Other reports suggest the new finance minister might try a more radical approach: cut top income tax rates sharply, from 60% to 35%, speed up the privatisation of state enterprises and launch a huge programme to invest in the country's infrastructure.

Mr Netanyahu is on record as a believer in Bush economics, where tax cuts are expected to translate into greater demand from consumers.

Pricey plan

But the finance minister has dismissed the reported details of his economic plan as "speculation", and added "we have not yet made a decision".

Israel hopes to finance the package with the help of an additional $4bn in defence aid and $8bn in loan guarantees from the United States.

The country already is the largest recipient of both aid and military support dispensed by the US Government.

Washington has reportedly asked Israel for more clarification as to how it will try to get the economy back on track.

And commercial lenders want more clarity as well.

The government will not "be able to delay the budget cuts for too much longer... we have international credit rating agencies watching the deficit carefully, so something has to be done", said Doron Weissbrod, an economist at Bank Hapoalim.