Palestinian Prime Minister Salam Fayyad met union leaders and employers on Monday to pursue agreement on the 2012 budget after a public outcry against austerity measures thwarted his first plan to tackle a debt crisis.
An abrupt freeze in more than $150 million in US aid last year has slowed the Palestinian economy, widening the deficit to $1.1 billion after rapid growth in 2009-2010.
Washington cut off funding after Palestinian President Mahmoud Abbas made a bid for UN recognition of Palestinian statehood, which Israel - backed by Washington - insists can be achieved only through negotiation and a peace treaty.
Fayyad's proposals for plugging the gap between revenue and spending, by raising income and company taxes and laying off public service workers, had to be suspended on 29 January following protests. He has set a deadline of 15 February to reach a consensus on how to raise at least $350 million to keep the deficit down.
"The government is seeking to overcome this crisis through a national dialogue aimed at providing the highest level of agreement in order to share the burden," he said.
Mohammed Masrouji, head of the Palestinian Businessmen's Association, said raising taxes would be counter-productive.
"We expect the government to reconsider raising taxes ... Increasing taxes will result in more inflation and unemployment and will discourage investment," he told Reuters.
The Palestinian Authority, overseeing a population of 4.1 million, plunged deeper into the red in 2011, nearly tripling its 2010 deficit of $350 million.
Unemployment in the West Bank is over 20 per cent and in the Gaza Strip over 35 per cent. GDP growth slowed sharply from 9 per cent in 2010 to 4 per cent in the first half of last year. The average public sector salary is 1,600 shekels ($430) a month, the Palestinian civil servants' union says.
Palestinians say Israeli occupation is the biggest obstacle to economic growth. But no end to occupation is in sight. Exploratory talks to revive negotiations broken off by Abbas in November 2010 ended inconclusively on 26 January.
Western-backed Fayyad, a former World Bank economist, had counted on $1 billion in foreign aid in 2011, but less than $750 million arrived. His 2012 budget is estimated at $3.5 billion.
The budget crisis coincides with uncertainty over how much time Fayyad will have to bring in the new budget and implement whatever austerity measures can be agreed.
A pact signed on Monday by Abbas's Fatah movement and Khaled Meshaal of the Islamist Hamas organisation agreed to bring in a unity government of technocrats, with Abbas to take over as prime minister.
Fayyad, who is also finance minister, said in a statement welcoming the pact that ending the "internal division ... is an imminent national necessity". But he did not address the question of his own future.
Fayyad, 59, is praised by the International Monetary Fund for making Palestinian institutions ready for statehood over the past two years. But fiscal sustainability and economic viability depend on growth.