The Bank of Israel has updated its economic growth forecast for 2002, and expects that gross domestic product growth will be in the range of zero to a negative 1%.

Meanwhile the treasury has left its 2% economic growth outlook unchanged.

The bank said that these days its economists are preparing its official economic growth estimates, however, Bank of Israel Governor David Klein has recently said he doesn't expect any economic growth this year.

Most economists in recent week updated their economic forecasts, the majority expecting zero economic growth at best.

According to Bank of Israel calculations, the deviation from the government deficit target will come to NIS 8 billion to NIS 11 billion, 1.7% to 2.2% of GDP above and beyond the 3% target. The bank estimates that government spending won't deviate from the budget framework, and any increased spending, for instance due to the security situation, would mean additional budget cuts in order to avoid widening the deficit further. The bank said that if there is no economic recovery in the second half this year, resulting in GDP dropping by more than 1%, the deviation from the deficit will worsen accordingly.

The bank said that tax revenue data to date reflects a NIS 1.7 billion shortfall against the seasonal range of collected revenue necessary to meet the deficit target. All the income shortfall relates to income tax and property tax, while revenue from customs and fees is as had been expected.

Assuming that this year GDP remains unchanged compared with 2001, and granted tax breaks for the residents of Israel's south and the tax breaks provided under the Rabinovich tax reform recommendations, the economists estimate that the shortfall in tax revenue will come to NIS 6.5 billion to NIS 7.5 billion. The economists believe that a 1% drop in GDP could widen lost revenue by more than NIS 9 billion.

The bank expects NIS 500 million to NIS 1 billion shortfall in non-tax income, excluding bond acquisitions by the National Insurance Institute, noting it is hard to provide an accurate forecast in the absence of details on non-tax revenue.

The bank estimates NIS 3 billion to NIS 4 billion shortfall in government revenue from NII.

The bank noted that in addition to adjustments required for meeting the deficit target for 2002, significant adjustments will be needed also in the next budget in order to meet the 2003 deficit target, 2% of GDP. The bank's position is based on the fact that this year the government will have substantial one-time revenue. Among other things, U.S. aid that was due to be transferred in 2001 was transferred this year, and there are many one-time cuts in the budget for 2002.