US embassy cable - 05TELAVIV2985

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 002985 
 
SIPDIS 
 
E.O. 12958: DECL: 05/10/2015 
TAGS: EFIN, PREL, KWBG, IS, ECONOMY AND FINANCE, GAZA DISENGAGEMENT 
SUBJECT: KNESSET FINANCE COMMITTEE CHAIR BRIEFS AMBASSADOR 
ON ECONOMIC ISSUES 
 
Classified By: Ambassador Daniel C. Kurtzer for Reasons 1.4 (b,d) 
 
1. (C)  Summary.  Knesset Finance Committee chair Yaakov 
Litzman discussed Israeli economic and political developments 
with the Ambassador May 9.  Litzman highlighted the difficult 
budgetary situation created by disengagement, noting that his 
committee had failed to agree that day on approving 
legislation funding equipment needed for IDF personnel 
involved in the withdrawal of Gaza settlements.  (Note: This 
legislation was finally approved May 10.  End Note).  Litzman 
claimed to be concerned about the GOI's concurrent push on 
disengagement and economic reform, stating that this was 
undermining popular support for PM Sharon and the Likud when 
both needed it most.  The Ambassador raised USG concern over 
settlement expansion, noting that funds saved here could pay 
for disengagement.  The Ambassador also raised recent GOI 
procurement decisions where U.S. companies had been 
disadvantaged. End Summary. 
 
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Ambassador Expresses Concern over Settlements 
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2.  (C) In response to Litzman's expression of concern over 
how the GOI could fund disengagement, the Ambassador noted 
that the GOI and the Knesset could find the required funds by 
reducing settlement expenditures.  In fact, the Ambassador 
added, settlement expenses potentially cost the GOI twice, 
since the USG was supposed to deduct an amount equal to 
settlement expenditures from the amount of loan guarantees 
provided under the 2003 Loan Guarantee Agreement.  Settlement 
expansion also ran directly against USG policy and was thus 
an irritant in U.S.-Israeli relations. 
 
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Litzman: Don't Hit the People with Both Fists 
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3. (C) Litzman turned to the subject of disengagement, noting 
the GOI was making a mistake in pushing economic reform and 
disengagement at the same time.  "You can't hit people on 
both the economic and the security front at the same time. 
It's too much."  Litzman expressed concern about 
disengagement's chances of success: "No one knows what will 
happen with disengagement.  This is not Yamit," he said, 
referring to Israel's evacuation of Sinai in the early 1980s. 
 Litzman enumerated cuts made under recent budgets, including 
to funds going to the poor, to the elderly, and to the 
ultra-religious.  All these unpopular actions, Litzman 
claimed, were costing the Likud dearly exactly at the time it 
needed the people's support.  The only reason the government 
was not under more serious threat was because the Labor Party 
was itself so badly split.  "But who knows what will happen 
in the next elections?  Perhaps Likud will break up." 
 
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Tax Reform?  Unlikely, Litzman Says, Unless the USG Helps 
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4.  (C) In response to a question by the Ambassador about the 
potential for further tax cuts by the government, Litzman 
replied that he doubted further reforms would be introduced. 
"Disengagement costs too much," Litzman said, "and the 
government has no margin to pay for further tax cuts."  On 
the other hand, the GOI could afford both disengagement and 
tax cuts if the USG were to "chip in" by increasing its 
assistance levels to Israel.  Increased assistance would also 
help lessen the pain of disengagement, Litzman noted.  The 
Ambassador reminded Litzman of the current level of USG 
assistance. 
 
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Commercial Issues 
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5.  (C) The Ambassador raised U.S. concern over bilateral 
commercial relations.  He noted the increasing U.S. trade 
deficit with Israel, and enumerated some specific instances 
of counterproductive Israeli actions.  He told Litzman of the 
GOI decision to purchase a non-USG scanner for the Haifa 
port, in spite of the funding coming from U.S. FMF funds. 
This was not acceptable.  The Ambassador also noted the GOI's 
decision not to purchase refurbished stock from a U.S. firm 
for its new train lines, in spite of the low cost of the U.S. 
equipment.  Litzman did not respond. 
 
 
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