Mounting financial problems on the Palestinian government

Published August 9th, 2011 - 05:30 GMT

Economists agree that no short term solutions are available to the Palestinian government, except relying on donors to plug the deficit to allow the government to pay salaries and that the Palestinian government must initiate the necessary steps to deal with the budget deficit. Economists are blaming government policies that needlessly increased spending on the military whilst neglecting productive sectors such as agriculture and manufacturing.

Yousef Daoud, Professor of Economics at Birzeit University, believes that the national authority lacks the tools that states normally possess to deal with these sorts of crises, such as a monetary policy because of the complete lack of cash, leaving only financial policy as a means of affecting GDP by increasing government spending. He added, "These sorts of policies will not have a significant impact because GDP, as well as the tax base, is not very large. The Palestinian Authority depends on customs imports from Israel, and on donor nations." Daoud believes that raising taxes will have a negative impact, will increase unemployment and lead to a worse economic situation and widespread recession.

As for the effects of government expenditure rationalization, Daoud said, "It will have a more negative effect as it decreases spending and leads to greater economic recession". The solution in his view is to decrease government spending on the security apparatuses which he believes is unjustifiable and a waste of public finance. He points to the government's success in controlling employment spending in the civilian sector in the last five years. In the long term Douad affirms that in addition to decreasing expenditure, the government should moderate income tax since other direct and indirect taxes are already very high, and are linked to tax policies inside Israel. He called for studies to be undertaken on the most effective ways to control financial stability and its effect on income distribution which has worsened in recent years, leaving an increased gap between the rich and poor.

Palestinian Minister of Economy, Hassan Abu Libdeh revealed that the cabinet will convene a special session to consider ways of dealing with the financial crisis. The issue will also be discussed by the PLO executive committee. Abu Libdeh refused to discuss the possibility of weathering the crisis by imposing new taxes or austerity measures, except to say, "The crisis is real and present, and not fleeting, and we will overcome it by several means. It requires absolute seriousness to deal with, and is the collective responsibility of the government and the political system".

"We are at a crossroads, and the government carries a part of the blame because it did not implement enough measures in the past to control it by tightening its belt, in addition to some countries failing to follow through on their commitments". According to Abu Libdeh, more control over imports is needed by improving tax collection efficiency to end tax and customs evasion. (Source:

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