On September 10, 2012, five Palestinian transportation unions called an all-day strike in the West Bank to protest the rising price of gasoline. The strike resulted in the cancellation of schools and the closing of many stores and commercial industries.

The strike was one of a series of demonstrations that paralyzed West Bank city centers as protesters called for government subsidies and the resignation of Palestinian Prime Minister Salam Fayyad. On September 9, the Palestinian Authority sent a letter to Israel requesting a review of the 1994 Paris Protocol that ties the economy of the Palestinian Authority to that of Israel, preventing a lowering of value added tax and the negotiation of separate free trade agreements.

The current crisis was spurred by a one percent increase in the VAT, raising it to 17%, that went into effect in Israel on September 8, followed that same day by a 7.1% increase in the price of a liter of gasoline at the pump in Israel. These increases were passed on to Palestinians in the West Bank and Gaza Strip, occupied by Israel in 1967 and Israel’s second most important export market behind the United States.

The rise in fuel prices followed a similar one in April. A Bloomberg study in August found that Israel ranked third out of 60 countries in the price of premium gasoline, averaging a whopping $9.28 a gallon compared to $1.73 in Egypt and $3.75 in the United States.

Palestinian per capita income in 2011 was just $1,500, compared with $31,000 in Israel.

Overall, however, the prices of staples such as rice, sugar and flour in the occupied Palestinian territories had been in decline since mid-2011. Poverty affected about a quarter of the population in 2011, according to the Palestinian Central Bureau of Statistics and first quarter 2012 reports showed unemployment was at its highest since 2010 at 20.1% in the West Bank and 31.6% in the Gaza Strip. Construction, the most active sector in the West Bank where the protests have taken hold, has been in steady decline since early 2011.

Israel continues to control the Palestinian economy through its policies of closure and blockade, which restrict the movement of people and goods. A March 2012 World Bank report found that Israeli restrictions are the “biggest constraint” on the growth of the Palestinian private sector. Sixty percent of the West Bank remains controlled by Israel and off-limits to Palestinian development and Israeli policies prevent almost all exports from the Gaza Strip.

Most damaging is the budget crisis of the Palestinian Authority, which is plagued by donor shortfalls that meant a deficit of $690.5 million by the first quarter of 2012 (a quarter of the Palestinian GDP). In August, it owed the Palestinian private sector $500 million and banks another $2 billion, with no option of borrowing more. Government employees, numbering 150,000, are repeatedly paid late after donors come through with cash infusions. August salaries had not yet been paid at this writing, although officials said a proportion of wages would soon be dispersed.

Israel in part precipitated the current budget crisis by briefly holding on to about $100 million in tax revenues it collects monthly on behalf of the Palestinian Authority. The move was intended to punish the Palestinian leadership for approaching the United Nations for state membership. The statehood bid failed in committee at the UN Security Council.

In August, the private Jerusalem District Electricity Company announced that its Israeli supplier was warning that failure to pay $175 million owed the company by the Palestinian Authority and delinquent subscribers would result in power outages in September.

Palestinian Prime Minister Salam Fayyadzzz*zs government has implemented a plan to close its budget gap. Widespread protests in January 2012 led to the scuttling of a proposed income tax hike from 15% to 30% for the highest Palestinian wage earners. Still, officials say the government is on schedule to increase local revenues, barring an economic downturn.

In August, Fayyad agreed with the Israeli finance minister to change the method of calculating Palestinian tax revenue collection from reported to real monitoring of goods transfers, a move that is intended to cut tax evasion.