(S) THE COST OF THE CONFLICT: EMERGING NUMBERS AND

S E C R E T TEL AVIV 003338 SIPDIS E.O. 12958: DECL: 08/21/2016 TAGS: ECON IS SUBJECT: (S) THE COST OF THE CONFLICT: EMERGING NUMBERS AND FORECASTS OF HIGHER THAN EXPECTED COSTS Classified By: Ambassador Richard H. Jones for reasons 1.4 (b) and (d) ¶1. (S) As the GOI begins to calculate the total cost of the conflict with Lebanon, and residents of northern communities hardest hit by Katyusha rocket fire return home to assess damages, rumors already abound that the GOI will ask the USG to help pay for rehabilitating the north. Reports in local media estimate that defense costs alone for the war totaled NIS 7 billion (USD 1.6 billion). Minister of Finance Hirchson told a local newspaper (Globes) that the loss of economic growth to Israel's economy is estimated at NIS 10 billion (USD 2.3 billion) but cautioned that this is, "still not the end, as people are returning home and discovering the destruction." In addition, costs of direct damage to property and infrastructure, emergency assistance to municipalities in the north, and wage compensations will all factor into a total wartime cost expected to exceed NIS 25 billion (USD 5.75 billion). ¶2. (S) In his Sunday Cabinet meeting Prime Minister Olmert established separate Cabinet and Directors General Committees focused on rebuilding the north. Olmert named Vice Prime Minister Peres as the Acting Head of the Cabinet (for reconstruction) and said, "In addition, Minister Peres will coordinate the activities to raise funds around the world, in the framework of donations from Jewish communities and organizations, which will all be transferred to Haifa and the North." Olmert named Mr. Amos Yaron as the Coordinator of Government Activities in the Field of Rehabilitation and Infrastructure and Institutions. Ra'anan Dinur, Director General in the PM's office, is responsible for preparing a work plan including a budget for rehabilitation efforts. ¶3. (S) Besides direct aid transfers to the local authorities/municipalities in the north, the GOI has focused its efforts to date on creating a loan program for northern businesses harmed by the war. Minister of Industry, Trade, and Labor Ishay and Finance Minister Hirchson announced a government-backed loan program for small business owners in the north. The loans of up to NIS 750,000 (USD 172,500) are intended to provide a float to companies until they can return to full productivity. In most cases the GOI will guarantee up to 70% of each loan, subject to restrictions. Local small businessmen staged a protest outside the Haifa office where the two ministers were set to unveil the plan demanding compensation and grants, not loan programs. ¶4. (S) Rani Loebenstein, Senior Advisor to the Director General at the Ministry of Finance told EconCouns on August 22 that the costs of the war will be "higher than we thought," and likely well beyond the public estimates of NIS 25 billion. While there are no final numbers as damage assessments continue Loebenstein said the MoF is afraid of the impact of the war on fiscal policy. Loebenstein cautioned that the GOI would likely need to raise 2007 budget expenditures above the publicly forecast 1.7% increase, possibly up to 3%, to be able to pay for the war and rebuilding. He noted that reserves and expected increases in revenue remain insufficient to fill the budget gap. ¶5. (S) Debate in the Knesset Finance Committee ended on August 22 without a vote on cuts to the 2006 budget (estimated around NIS 2 billion) which were needed to transfer funds to the Ministry of Defense/IDF budget to pay for war costs. The senior Kadima member of the committee Avigdor Yizhaki told Haaretz newspaper, "the significance of this, is that today there is no coalition in the state of Israel." (Note: Yizhaki was referring to the refusal of Labor members of the committee to approve the cuts. End note.) Loebenstein said that even if budget cuts are successful this would be only a partial solution. ********************************************* ******************** Visit Embassy Tel Aviv's Classified Website: http://www.state.sgov.gov/p/nea/telaviv You can also access this site through the State Department's Classified SIPRNET website. ********************************************* ******************** JONES