There has been a dramatic improvement in the economic stability and substantial strength in the capability of the Israeli economy to deal with the social challenges which the State of Israel faces.

This current conference, a tradition of the "Globes" newspaper, is taking place in an atmosphere of unprecedented economic achievement for the State of Israel.

This year, the growth of the economy will be no less than 5.5%, and perhaps even higher. The rate of unemployment decreased in the final quarter to a rate of 7.4% – the lowest in over a decade. Our balance of payments is positive for the third year in a row, and the surplus will this year stand at $8 billion. Inflation is close to zero, our national debt has decreased to a rate of 82% of the GNP. In 2007, product per capita will average close to $21,000 and in terms of consumer power in Israel, its value is even higher.

All these measures point to a dramatic improvement in the economic stability and substantial strength in the capability of the Israeli economy to deal with the social challenges which the State of Israel faces.

These figures are accepted in such forums with peace of mind, as if they could be taken for granted, as if they were part of a routine which had existed for years in Israel, as if these were common achievements in OECD countries. This is not so. This is a phenomenon which is unique to Israel only over the past three to four years, and it should not be taken for granted.

One of the decisive conditions for the existence of economic growth in our country, as well as the impressive economic growth we achieved over the past few years is the existence of a political horizon.

I wish to state here, clearly and without hesitation, that with all due respect to the components of our economic policy, fiscal discipline, and strictness with regard to the budgetary spending ceiling, what significantly influences Israel’s economic achievements are our accomplishments in the war against terror, primarily in terms of its almost complete eradication from our city centers, the existence of hope in the political process and the system of extraordinary political relations we built with a number of countries in the Americas, Europe and Asia over the past few years. Israel bought an honorable place for itself in the global economy.

When there is political dialogue, when there is open and overt dialogue with most of the leading parties in the international community, when there is a horizon of peace rather than the ongoing danger of deteriorating into violence – there is also a chance for economic prosperity. Anyone who thinks that we can separate the two is suffering from self-delusion. There will be no significant growth if there is no political horizon.

I emphasize these things after Annapolis for a reason. Annapolis does not constitute an historic breakthrough. It was not planned to be one either. However, it provided us backup and support for this process of firming up the foundations for serious negotiations, meaningful reconciliation and perhaps even peace accords. One cannot prophesy economic growth while fighting against the reconciliation process and any negotiations with our Palestinian neighbors. One cannot be against Annapolis, endlessly frighten the public regarding national catastrophes, isolate Israel from the central stream of global politics and believe at the same time that markets can be increased, trade can be expanded, more foreign investors and investments can be brought here or that more and more countries can be encouraged to have improved economic relations with us.

I do not intend to stop. Annapolis was not an event, nor was it a show for the sake of publicity.

Over four years ago, in an interview with the ‘Yediot Aharonot’ newspaper, I said that I believed that the shortness of time obligated us to act quickly to reach a political agreement which would allow us to evacuate most of the territory in Judea and Samaria, create a clear barrier between ourselves and the majority of Palestinians and allow them to establish an independent, vibrant and democratic state of their own.

The destruction of the two-state model and international backing for the idea of one state for all residents with equal rights to vote threatens the existence of the State of Israel. I never said that if there was not a political solution, the State of Israel was finished. If the solution of two nation-states for two people is removed from the international agenda – and we continue to be in all the territories, and the Palestinians demand total democratization of the country under whose patronage they live – this will create an existential threat to Israel, certainly as a Jewish state.

Today there is a chance, there is an opportunity, there is the beginning of dialogue with a Palestinian leadership which declares its desire for peace. It is true that this leadership is not strong enough. They still do not have the firm infrastructure of a country, with all the accompanying institutions and law enforcement authorities needed for its establishment. However, there is a leadership which declares its desire to make peace with us. This is an opportunity with many uncertain components, many risks and many dangers. It is impossible not to recognize them, it is impossible to ignore them. Under no circumstances can we allow this uncertainty and the risks to decide. Because there is also an opportunity.

I intend to take advantage of this opportunity to conduct serious, continuous, ongoing negotiations in order to reach a historic breakthrough towards a new political reality.

What are the main targets of the economic policy?

1. The primary target is to reach sustainable growth of approximately 6%. This is a pretentious target, but not an impossible one. If we continue to maintain fiscal discipline and cautiously make the spending ceiling more flexible, as we have done until now, we can reach this target.

2. In the field of employment, we have, for the first time, defined quantitative targets. Our intention is to reach an employment rate of 71.7% by the year 2010 for people between the ages of 25 and 64. That is to say, a growth rate of almost 1% per annum for the coming years.

3. Increasing the rate of participation in employment, primarily among the Haredi and non-Jewish sectors. These two sectors can and must become much more dominant in the cumulative influence they have on the economic development of Israel.

4. Reducing poverty: increasing the income of the lowest fifth of the population by 10%,which is more than the growth rate per capita, over the next three years. Achieving this target will bring an additional 1.3% to 2% to the GDP, which translates to additional income in the amount of between NIS 8 and 12 billion per annum.

5. Upgrading and strengthening the traditional industries: the Israeli economy cannot be built solely on the hi-tech field. The importance of hi-tech is immense, its contribution to the achievements of the economy in Israel are unprecedented, but the State of Israel can be a world leader in the traditional industries as well, and conquer new markets in Europe and Asia with innovative products in the traditional industries.

6. And of course, education: elementary school education, pre-school, taking care of those under the age of six, focusing on children at risk and in weaker populations, secondary education and higher education. In the 2006 budget, we added NIS 1.1 billion to the education budget above that of 2005, and greater than the natural increase. In the 2007 budget, we added NIS 700 million to the education budget above that of 2006, and greater than the natural increase. In the proposed 2008 budget, we propose adding a real addition to the education budget in the amount of NIS 1.9 billion compared to the 2007 budget…

The State of Israel lacks natural resources. This is why our human resources are so important. I believe we must nurture this resource by strengthening the education system in Israel until it becomes among the best in the world. Israel’s sophisticated electronics system and technological innovations have become famous around the world. We have made great strides because we had no choice. We had to be first in order to safeguard our existence. This is true with regard to nurturing our human resources and social strength as well. We have no choice and therefore we will achieve the necessary accomplishments in the field of education as well.