With the possibility of a confrontation with Iran looming on the horizon, Prime Minister Ehud Olmert established a special committee Sunday that will make recommendations to the 2007 budget aimed at "improving the army's preparedness for future challenges." The committee will be made up of representatives from the Defense Ministry, Finance Ministry and National Security Council. No deadline was given for the recommendations, although a cabinet meeting to approve the 2007 budget has been set for September 6. The committee is to recommend how much to increase the IDF budget, working on the premise that "the IDF cannot operate under its current budget" and that the IDF's budgetary baseline needed to be increased. In addition, the committee will study what budgetary means are necessary to "move the army up to the next level." Senior defense officials slammed the Treasury on Sunday, claiming that is policy of cutting the defense budget over the past few years was what led to the outcome of the war in Lebanon. "The time has come to change the Treasury's policy," a senior defense official said. "This policy has ignored security considerations for years and has led us to one of the worst crises in our history." The defense establishment is asking for NIS 30 billion - the cost of the war - as an immediate compensation. The next stage would be increasing the annual budget back to NIS 36.5b. instead of its current NIS 33.5b. "The war," the defense official added, "was a wake-up call that it is time to sober up and understand the potential threats terror groups and their missiles pose to Israel. A situation under which reservists doesn't train for years cannot repeat itself." The Treasury slammed back and said that it would not work too quickly to provide the Defense Ministry with the funds it is asking for. Of funds that will be allocated, he said, it was not known whether the money would come from the deficit or from different sections within the budget. "At the moment, the Defense Ministry [thinks we should provide the money] and we think otherwise," a Finance Ministry source said Sunday. "There are tough demands on the country. Tens of billions of shekels is a large amount of money, and we also have a state to run." Vice Premier Shimon Peres told a World Jewish Congress meeting in Jerusalem that Israel needed to focus on "renewing" and "rehabilitating" the army. He said Israel also needed to develop new weaponry to combat the new threat of "terrorists with missiles," and to prepare for war against individuals and small groups armed with the world's best weapons. "It is not logical to chase after a single terrorist with a plane that costs $100 million," Peres said. "We need to preserve out technological advantage and build new deterrence. That can be done with the help of nano-technology." Olmert, meanwhile, held a meeting with Defense Minister Amir Peretz, Finance Minister Avraham Hirchson and top Defense Ministry and Finance Ministry officials before Sunday's cabinet meeting to discuss how much money the army needed to return it to where it was before July 12, when the war broke out. A committee was established that was to present Olmert with a bill by the end of the week regarding how much the war cost the IDF. In a related development, the government approved Defense Minister Amir Peretz's proposal Sunday to grant financial benefits to IDF reservists who participated in the fighting in Lebanon. The package includes giving NIS 50 per day to each soldier who served eight days or more, with the sum not to exceed NIS 1,300 per soldier. The budget for this stands at NIS 65-70 million. In addition, the Finance Ministry was authorized to provide state guarantees that would provide favorable loans to reservists whose businesses were hurt by their absence during the war. The logic here, according to one government source, was that just as compensation was needed to be provided for someone from Kiryat Shmona who closed his small business and went south during the war to get out of Katyusha range, so too must similar compensation be provided for a reservist from the center of the country who had to close his small business during the war to go up north to fight. Likewise, penalties for late tax or national security institute payments will be waived for reservists during the month of the war, just as will be done for northern residents. Peretz was also authorized to set up a special fund in the Defense Ministry to assist reservists who suffered financial loss as a result of being called up on short notice for extended service. Some NIS 45 million will be set aside for this purpose. In a related development, Olmert convened a discussion on the government's preparedness for emergency situations, on the basis of the lessons of the recent campaign in the North. Prime Minister's Office Director-General Ra'anan Dinur submitted recommendations that included the following: â€¢ The state will provide residents who stay in shelters for an extend period of time "essential" goods and services, including food and medicines. â€¢ The government will also encourage the activity of private sector organizations during emergency situations, but only to provide additional services that are not defined as essential. The government has come under intense criticism for failing to provide vital services and for relying on non-governmental organizations and individual initiatives to fill in the gaps. Olmert also instructed the IDF Home Front Command to appoint an officer for every city in the country whose job it would be to coordinate home front assistance activities in emergency situations, and respond when the local authority finds it difficult to provide emergency services. Olmert also instructed Interior Minister Roni Bar-On to make sure all shelters in residential buildings are properly maintained. The war revealed that scores of shelters were in bad disrepair. Olmert also said that every city in the country needs a municipal control center to cope with emergencies, and that these will be under the supervision of the Home Front Command Additionally, the National Security Council was charged with submitting within 60 days recommendations on the preparedness of organizations that deal with civil defense, including a reconsideration of the division of responsibilities between the various relevant bodies. Daniel Kennemer contributed to the report.