1. The bomb is still ticking.

Almost all Israel's politicians have been competing to see who can most savagely attack the budget the Finance Ministry presented on Friday. For most, it's a golden opportunity to get some press and get points with their constituents for their bleeding hearts.

We should therefore remind that whole crowd of palpitating hearts clutching the budget to their breasts that the bomb hasn't been defused yet, that the shekel's erosion and outflow of capital only paused because the finance minister admitted to his appalling mistakes and clarified that this time, he would present a responsible budget.

The steep cuts the treasury incorporated into the 2003 budget are the minimum needed to deflect the market from its destructive mad careen. Unless the cuts are carried out, unless the financial markets believe that the government is committed to curbing its spending, the financial establishment could revert to its path leading to crisis.

The quiet that descended on the forex and money markets in the last month is deceptive. It does not portend stability, it does not attest to an upswing in Israel's economy. It is the tranquility of waiting. Investors are waiting to see whether the declarations by the finance minister and prime minister are worth their weight in gold, or grains of salt. If the suspicion arises that it was all babble, Israel's credit rating will be downgraded, foreign currency will resume its outward flight, and the winds of crisis will blow with renewed strength.

Bank of Israel figures published yesterday about repatriation of foreign currency deposits by foreign investors in June are a warning. Foreign currency deposits are a key element of the Israeli banking establishment, a pillar that has stood firm in all previous economic and security crises. The $400 million that foreign investors withdrew from foreign currency deposits are still a drop in the ocean, but the drizzle could herald a coming storm.

2. Shalom's real test

Unlike most of his previous endeavors, the 2003 budget that Finance Minister Silvan Shalom presented at a press conference on Friday incorporates several courageous, and important, steps. His greatest move is to slash at the blubber coating Israel's defense establishment, which traditionally terrifies the public with its images of compromised security when its coddling is threatened.

The defense cuts, coupled with intentions to suspend civil service hiring and to abolish overtime, are Shalom's real test. They are giant steps with long-term significance for the marketplace.

The real question is whether Shalom presented the cuts with intention to carry them out, or with intention that the government and Knesset foil them. Then he could lay the blame for Israel's economic deterioration at other doors. If Shalom fails to fight to the bitter end for the cuts, then the 2003 budget will go down in history as a dismal PR gambit by one of the worst finance ministers Israel has known, a man who didn't want to do the right things - but only wanted to look as though he were doing them.

However. If Shalom is committed to trimming the military's profligacy, he will have to make some political sacrifices. If he does, we will know that he truly did learn from his mistakes, that he can change, and that he thinks not only of Silvan Shalom's political career but of the economy too.

3. Unemployed, or lazy bums?

In his budget proposal, Shalom also tries to comprehensively reform the labor market by significantly impairing assistance to the unemployment. Most of Israel's unemployed are sluggards, the Finance Ministry declared: they could make a living, but don't have the incentive, thanks to unemployment benefits.

The treasury's figures fail to convince that the only ones to be hurt from the reform are terminally lazy. The cuts in state subsidies look likely to mortally hurt some of the most miserable people in Israel.

To gain public support for painful reforms, the treasury must prove that the step really does target only people perfectly capable of working. It has not proved that yet.

Nor would that alone suffice. The treasury must also prove, before it cuts supplemental income for the weakest members of society, that it has first trimmed every other layer of fat that it possibly can.

This would be the right time to abolish the plan to grant tax breaks on real estate and housing, which was suggested by the first Rabinovitch tax panel. The NIS 700 million that the treasury lavished on land- and homeowners are now needed for the budget cuts of 2003.

Even if there is justice in reforming land taxes, reducing them in the long run, this isn't the time. Israel cannot cut support for single parents while lowering betterment tax rates for clients of Yair Rabinovitch, the tax consultant who headed the tax reform committee, and the rest of Israel's wealthiest people.