Ali Sawafta
February 15, 2012 - 1:00am

RAMALLAH, West Bank, Feb 14 (Reuters) - The Palestinian Authority approved income tax rises on Tuesday, pushing the top rate to 20 percent, as it seeks to tackle a debt crisis aggravated by lower-than-expected foreign aid revenues including the freezing of U.S. aid last year.

The top tax rate will rise from 15 percent to 20 percent, a cabinet statement said, effective from this year. Prime Minister Salam Fayyad was last month forced to back down on doubling the rate to 30 percent after a public outcry.

Fayyad's Western-backed government has drafted a $3.5 billion budget for 2012, which also includes spending cuts and corporate tax rises, as it aims to bring the deficit, which nearly tripled to $1.1 billion or around 15 percent of GDP last year, down to $750 million.

Fayyad told reporters on Monday night that the private sector had agreed in talks with the government to a two-year delay on the implementation of tax breaks for investors, which are expected to increase government revenues by $60 million a year for those two years.

The Palestinian Authority - which exercises limited self-rule in the Israeli-occupied West Bank - depends on financial support from the United States, the European Union and Arab states to pay the salaries of public workers, including teachers and security personnel.

However, the United States abruptly cut off funding last year after President Mahmoud Abbas made a unilateral bid for recognition of Palestinian statehood at the United Nations.

The Palestinians had planned for foreign aid of about $1.1 billion in 2011, but Fayyad said it received just under $750 million.

The Authority's growing financial difficulties coincide with a period of political uncertainty for the Palestinians as peace talks with Israel broke down last month and there is no sign they will be revived soon.

The government's plans to cut the deficit also call for more companies and organisations to pay taxes on their operations and possible early retirement for some of the Palestinian Authority's 153,000 public sector workers.

Officials say more than $150 million of U.S. aid is frozen. The U.N. statehood initiative has ground to a halt, with the Palestinians failing to get enough backing to secure a vote in the Security Council.

Fayyad, appointed by Abbas in 2007, is credited with revitalising the economy but analysts expect economic growth almost halved to just below 5 percent last year and forecast 4 percent growth this year.

The Islamist group Hamas, which controls Gaza, accuses Fayyad of helping Israel to blockade its coastal territory and has never recognised him.


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