Reconciliation between Fatah and Hamas could lead to a 20%-30% increase in the PA’s 2018 budget that is being negotiated over the final weeks of 2017. The PA’s budget for envisages spending of $4.48bn, up by 5.4% from $4.25bn in the previous year. The issue of Gaza’s employees will pose the biggest financial challenge to the 2018 budget, with the payroll bill accounting for more than half of it. The 2017 budget allocated about $2.25bn to salaries of current civil servants, amounting to 54% of total expenditure. The salaries for the 40,000-50,000 Gaza civil servants could add a further $600m. External budget support is forecast to fall from ILS2.9bn in 2016 to ILS2.5bn in 2017 and 2018. However fiscal performance was better than expected in the first half of 2017 with overall deficit declining to an annualised 6.7% of GDP, lower than the budgeted shortfall. Total revenues rose by 7.3% to ILS6.5bn in the six months to June compared with the first half of 2016. up well relative to the same period last year. Higher domestic taxes compensated for weaker non-tax revenue. Transfers of clearance revenues increased by almost 6%. Recurrent spending was about 3% lower than the first half of 2016, reflecting late approval of the 2017 budget and the initial impact of decisions to limit payments to Gaza.