The Bank of Israel predicts that the government deficit for 2001 will be 2.9% of the gross domestic product, a whole 1% beyond its stated target.

Tax revenue fell short of expectations, while spending was not curbed concurrently, the central bank explains.

The central bank forecast is based on figures for January to September, inclusive.

Israeli economic activity was undermined by regional hostilities and the global slowdown, the central bank explains. The fighting directly impacted on tourism and construction, and the global technology crisis reduced Israeli hi-tech export by 18% in the second and third quarters.

Meanwhile, tax revenue increased just 0.7% in the first nine months compared with the same period of last year, below the forecast on which the 2001 budget had been based.

Weakened profitability reduced taxes from the business sector and from the self-employed by about 4% as the recession intensified from April to September, going by most economic indicators.

From April to September the combined index of indicators declined by 4%, export of goods (excluding ships, planes, and diamonds) decreased by 11% compared with the second half of 2000, industrial production between April and August was 5.1% less than in the preceding six months, and turnover of businesses and services slid by 2%.