Prime Minister Binyamin Netanyahu said on Sunday that the Finance Ministry might cancel the majority of the proposed budget cuts, including the hospitalization fee, if it strikes a package deal with the Histadrut Labor Federation and employers. "We are advancing the approval of the state budget and the economic plan as we are faced with two crises: the greatest global economic crisis we have seen in the past 80 years and economic threats and challenges on our country. Against this background, we will need to find a balance between economic and security needs and of course other needs," Netanyahu said during the cabinet's discussion of the state budget 2009-2010 on Sunday. "If we reach an agreement for a socalled package deal with the Histadrut Labor Federation and employers, I believe that most of the proposed issues [budget cuts] will be canceled. We have great responsibility to the needs of the country, but we also need to act responsibly toward the weakest segments of the population." The prime minister reiterated that the government will do everything to avoid hurting the weak. "We will cancel the proposed cuts in payments to Holocaust survivors, the elderly and and the handicapped. In addition, we will cancel the hospitalization tax and examine other issues," he said. Last Wednesday, the Treasury proposed a list of controversial cuts totaling NIS 7 billion, including a NIS 3b. cut in the defense budget, and welfare reductions that would hurt the weak. Cuts to welfare, which sparked furious reactions across the political spectrum and the Histadrut Labor Federation, included reducing child allotments by 10 percent, freezing National Insurance Institute payments to the elderly, disabled and Holocaust survivors, and the introduction of a NIS 50 charge for every day patients are hospitalized. Over the weekend, the Histadrut started marathon meetings with senior officials in the Finance Ministry, which continued until late on Sunday, in an effort to agree on a package deal by this Tuesday, when the state budget 20092010 will be presented to the cabinet for approval. As part of the package deal the Finance Ministry is demanding that the Histadrut emulate the private sector and agree to a freeze of public sector wages in 2009-2010, which would save the Treasury NIS 7b. over two years. The government is running into a massive deficit as state revenues fall rapidly, and needs to make budget cuts of NIS 14b. over two years to keep within the set deficit limit of 6% of GDP. Histadrut chief Eini is staunchly opposed to an across the board salary freeze for government employees. As of press time, the two sides were still negotiating the terms of a puzzle of agreements including a partial salary freeze which might include a freeze on one-off payments such as promotion payments and on annual allowances for clothing and health. Still on the negotiation table was the Treasury's demand to delay the planned 5% salary hike in the pubic sector, which was agreed upon last year. In exchange for a freeze on public sector wages, as well as ensuring industrial quiet, the Treasury is understood to be willing to agree to the Histadrut's demand to increase the year-on-year increase in the government's spending ceiling from 1.7% to 2.5%. Meanwhile, Barclays Capital economist Svitlana Maslova warned of a ballooning budget deficit while pointing out that although Israel should have negative growth this year, it was likely to be much less severe than in its peers. "The main risk to Israel's outlook is the extreme sensitivity of fiscal revenues to the fall in growth," said Maslova. "The high sensitivity of budget revenues is likely to result in a budget deficit ballooning to 7.8% of GDP this year, from 1.3% in 2008. Its financing may strain the local market." The state budget 2009-2010 draft is based on a budget deficit of 6% of GDP in 2009, and 5.5% in 2010. "While we believe the Finance Ministry's budget revenue forecast is optimistic for the remainder of 2009, 2010 seems more realistic, especially because we think its growth forecast of 1.5% for 2010 is conservative," said Maslova. She added that the ability of the government to stimulate the economy was limited by the relatively high public debt-to-GDP ratio at 78% and a rule capping expenditure growth. "A 2.5% year-on-year increase in expenditures versus the current 1.7% would bring the deficit close to 9% of GDP," warned Maslova. Barclays Capital expects the economy to contract by 1.8% this year, which is a slightly more pessimistic forecast than the Bank of Israel's -1.5%. The economy is expected to rebound in 2010 and grow at 2.4%. "[This] is very good compared with the 4.7% GDP decline in the EMEA [Europe, the Middle East and Africa] region, reflecting the net international credit position of Israel," said Maslova. "Part of our encouraging outlook for Israel's growth comes from the positive signs of a recovery in the hi-tech exporters of Asia - Korea, Singapore and Taiwan - which are more appropriate comparators for Israel than EMEA countries."