Bloomberg News

Israel May Hold Palestinian Taxes on UN Vote, Steinitz Says

September 21, 2011

(Updates with Obama meeting with Abbas in 10th paragraph.)

Sept. 21 (Bloomberg) -- Israel may withhold as much as 40 percent of Palestinians’ financial revenue should they persist in pushing for a vote on statehood at the United Nations, Finance Minister Yuval Steinitz said.

“It will be very difficult for us to continue to collaborate with a hostile Palestinian entity,” Steinitz, 53, said in an interview yesterday at Bloomberg’s headquarters in New York. “Maybe we will tell the Palestinians, ‘OK, collect your own tax. Why should we do it for you?’”

Israel collects about $1.2 billion in fees each year for the Palestinian Authority and has withheld the money in the past during disputes with the Palestinians. Both the U.S. House of Representatives and the U.S. Senate have called on President Barack Obama to reduce the Palestinians’ annual $500 million in foreign aid if they proceed at the UN’s September meeting.

“It’s not up to me alone to make the decision, but in my view, if they want to use their automatic majority in the UN, then I think we won’t be able to cooperate with such an assault on Israel’s very legitimacy,” Steinitz said. “We are concerned about the Palestinian attempt to betray the very essence of the peace process.”

Steinitz was appointed finance minister at the end of March 2009, when Prime Minister Benjamin Netanyahu’s government took office.

Economic Arsenal

Deputy Foreign Minister Daniel Ayalon warned the Palestinians that a formal request for UN recognition would lead to Israeli countermeasures. “There must be implications if the Palestinians realize their threat, because this is a clear violation of all agreements, it is irresponsible and we can’t ignore it,” he said on Israel Radio.

Israel’s ability to hurt its neighbor economically is a key tool the Jewish state has at its disposal to try and dissuade Palestinian Authority President Mahmoud Abbas from asking the UN Security Council on Sept. 23 to recognize a Palestinian state and accept it as a full member. As Israel’s top ally, the U.S. has said it would use its veto power in the 15-member UN body to prevent Abbas from reaching his goal.

“Everything depends on continuation of aid and the Palestinians being able to access their own money from the Israelis, in terms of stability and keeping things calm on the ground,” said Hussein Ibish, a senior fellow at the American Task Force on Palestine, a Washington-based group that advocates for a peaceful end to the conflict. “The grimmest scenario is the U.S. and Israel both deciding to punish the Palestinians.”

Obama Support

U.S. assistance to the Palestinians for 2010 totaled $740 million, directly and through organizations including UN aid agencies, according to a State Department fact sheet. Israel’s champions in the U.S. Congress have threatened to cut aid to the Palestinian Authority as punishment for seeking a UN vote.

For Obama, who is scheduled to meet in New York with Netanyahu this morning and Abbas this afternoon, the pressure to be seen as unwaveringly on Israel’s side is mounting ahead of the 2012 elections. Republican presidential candidate Rick Perry said yesterday that Obama’s policy in the Middle East was “naive, arrogant, misguided and dangerous.”

Israeli Defense Minister Ehud Barak said in an interview on CNN’s “Piers Morgan Tonight” that Obama “is trying, to the best of my judgment, to be even-handed with the Palestinians.”

‘Start to Move’

Barak said that Obama isn’t “part of the problem; he is part of the solution” and that it was “up to us, and mainly our counterparts,” including Abbas and Palestinian Authority Prime Minister Salam Fayyad, “to shoulder the burden of leadership and start to move.”

Palestinian negotiator Mohammad Shtayyeh on Sept. 13 dismissed concerns that the U.S. would cut funding if the Palestinians go to the UN. He also suggested Israeli threats to retaliate by holding back tax and customs revenue shouldn’t be taken seriously.

“Cutting off funds to the Palestinians carries with it a lot of repercussions that are not exactly in favor of Israel,” said Marwan Muasher, a vice president at the Carnegie Endowment in Washington and Jordan’s first ambassador to Israel. “If the Palestinian people see that their lifeline is cut off by Israelis, that might be the trigger for large-scale demonstrations in the West Bank and Gaza, especially in the context of what’s been happening in the Arab World.”

Steinitz also said retaliation from Israel won’t go as far as annexing the West Bank, as called for by some members of Netanyahu’s ruling Likud party.

“I don’t think that this will be our reaction,” he said. “Maybe because we always want to leave room for the future peace process.”

‘Probability of Friction’

In a separate interview with the British Broadcasting Corp., Barak said UN recognition of a Palestinian state would “raise the probability of friction because a state has self- evident rights.” If the Palestinians try to exercise those rights “on the ground, that will meet with our effective control of the area,” he said.

Fayyad is wrapping up a two-year program of strengthening the courts, roads, schools and other institutions that would form the basis of a Palestinian state, a process the International Monetary Fund says has largely succeeded.

“We are looking for this week being a week that produces an outcome that we can use to reaffirm our cause and bring us closer to our date with freedom,” Fayyad told reporters on Sept. 19 in New York after a meeting with donors.

Arab Pledges

Saudi Arabia said on Sept. 20 that it would pay $200 million to the Palestinian Authority to help Fayyad out of a financial crisis that has left him struggling to pay his employees in a slowing $13 billion economy and reliant on foreign aid to narrow a budget deficit of about $1 billion.

Still, Arab donors don’t always follow through on pledges. In a July 3 news conference at his office in Ramallah, Fayyad said that only Oman, Algeria and the United Arab Emirates had fulfilled foreign-aid commitments.

“Palestinians can expect generous pledges from Arab states, but must doubt they’ll actually arrive,” Ibish said in an interview. “There’s a real shortfall between what’s been pledged and what’s been delivered.”

By contrast, Israel’s economy is “very vibrant,” Steinitz said in an interview with Tom Keene yesterday on Bloomberg Television’s “Midday Surveillance.”

Months of turmoil in the Middle East have had a “very minimal” effect on Israel’s economy, even as diplomatic ties with Egypt and Turkey deteriorate, he said. Trade with Turkey grew “significantly” in the first half. The IMF raised its forecast for the nation’s growth rate for 2011 yesterday from 3.8 percent in April.

Economic Growth

Steinitz said the economy will grow 4.5 percent to 4.7 percent this year, more than double the 1.6 percent rate the IMF predicted yesterday for developed nations.

Still, the cost of insuring Israeli government debt against non-payment through five-year credit-default swaps rose to 189 this week, the highest for more than two years, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The minister has used his economic arsenal against Fayyad before. In May, he delayed transfer of the custom fees -- almost $100 million for the month -- until Palestinian officials offered proof the money wouldn’t go to the Islamic Hamas movement, which controls Gaza and is considered a terrorist organization by Israel, the U.S. and the European Union.

Two months later, Fayyad said he would have to slash June paychecks by 50 percent for 151,000 civil-service employees. International donors have pledged $971 million this year to the Palestinian Authority, about a quarter of its $3.7 billion budget.

“It’s not truly independent yet,” said Steinitz, who was a lecturer in philosophy at Haifa University before he entered the Knesset in 1999 as a member of the Likud party. “The economy is surviving only because of influx of funds from abroad.”

--With assistance from Jonathan Ferziger in Tel Aviv, Alisa Odenheimer and Gwen Ackerman in Jerusalem, and John Brinsley in Tokyo. Editors: Riad Hamade, Kenneth Fireman, Ben Holland, Louis Meixler.

To contact the reporters on this story: Flavia Krause-Jackson in United Nations at fjackson@bloomberg.net; Tal Barak Harif in New York at tbarak@bloomberg.net

To contact the editor responsible for this story: Riad Hamade at rhamade@bloomberg.net


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