The Palestinian Authority faces a fiscal crisis that could threaten its existence, in large part because it keeps expanding the public payroll despite sharply reduced revenues, the World Bank said in a report. The Palestinian economy declined further in 2006 from an already low level, and the per capita Gross Domestic Product (GDP) dropped by at least 8 percent, said the report, obtained by The Associated Press. The decline coincides with an international boycott of Hamas, which came to power a year ago. Since then, foreign aid has been redirected to Palestinian Authority President Mahmoud Abbas or disbursed as direct salary or welfare payments to Palestinians. The overall level of aid has declined, from about $1 billion in 2005 to more than $700 million in 2006. Most development programs have been cut, and the bulk of the money now goes to budget support. About 25 percent of the Palestinian labor force is unemployed, the report said. In Gaza, the rate is even higher, with 36 percent, up from 29 percent the year before. Hamas and Abbas's Fatah movement are trying to put together a coalition government, based on a power-sharing agreement reached last month. However, it's unlikely the international community would end its boycott, because the new government's program is expected to fall short of three conditions of acceptance, including recognition of Israel. The World Bank said donors must keep aid levels high, to sustain the Palestinian economy in the short term. The bank said the current method of assistance, by circumventing the Palestinian government, has undermined a key element of fiscal reform, the single Treasury account established several years ago. The report recommended that, "when circumstances allow," donors should stop sending money to Abbas and instead deal again with the Palestinian Authority. The bank suggested, though, that a change in funding would have to wait. "There are hopes that this slide (in reforms) may be reversed if a broader political compromise is obtained and donor funding resumes through normal channels," the report said. Abbas's office disbursed hundreds of millions of dollars in redirected foreign aid in 2006. A top Abbas aide, Rafiq Husseini, said earlier this week that the president's office is eager to revert to the old system of a single account as soon as possible. The World Bank warned that the Palestinian Authority government must start reducing its out-of-control payroll or face collapse. Some 165,000 Palestinians work for the government as civil servants and in the security forces. The World Bank said the public payroll has steadily expanded by nearly 9 percent a year since 1999. "Even in the midst of the acute financial crisis in the first quarter of 2006, the Palestinian Authority has added over 1,300 into the civil service and 6,800 into the security forces," the report said. The report cited the Palestinian Authority's "past irresponsible spending policies" - including the expanding payroll - as a key reason for a fiscal crisis that could threaten its existence. A sharp drop in revenues, including Israel's policy of withholding tax rebates - to date more than $500 million - compounded the problem. Even before Hamas came to power, the Palestinian Authority was running an average monthly deficit of $60 million, or 60 percent above the average monthly revenues it was receiving, the report said. The bank said the Palestinian Authority must try to reduce its wage bill from more than $93 million a month to $80 million a month, through steps such as a hiring freeze, reducing salaries and voluntary retirement. Palestinian Finance Minister Samir Abu Eisha said Wednesday that he had not yet seen the report and declined immediate comment. In other recommendations, the bank said Israel must radically improve the flow of goods and people in the Palestinian territories, including implementation of a US-brokered 2005 deal on Gaza crossings. It also said tax rebates collected by Israel "should be released directly to the Palestinian Authority." Israel has balked at releasing the money, saying it could be used by Hamas to finance attacks and buy weapons. Israel made a one-time transfer of $100 million directly to Abbas in January. Also, Israel has explained restrictions at checkpoints by citing security threats.