Israel Responds to Move to Recognize a Palestinian State by Withholding Funds

Israel will not transfer much-needed funds to the Palestinian Authority in the wake of the decision by three European countries to recognize a Palestinian state, the country’s finance minister said on Wednesday, as its foreign minister denounced the European moves as giving “a gold medal to Hamas terrorists.”

The decision by the finance minister, Bezalel Smotrich, a far-right leader who opposes Palestinian sovereignty, threatened to push the Palestinian government into a deeper fiscal crisis. He said in a statement that he had informed Prime Minister Benjamin Netanyahu that he would no longer send tax revenues to the authority, which administers parts of the Israeli-occupied West Bank in close cooperation with Israel.

Mr. Smotrich’s office signaled that the decision was at least partly a response to Spain, Norway and Ireland recognizing Palestinian statehood, and that the Palestinian leadership bore responsibility for campaigning for the move.

“They are acting against Israel legally, diplomatically and for unilateral recognition,” said Eytan Fuld, a spokesman for Mr. Smotrich, referring to the authority. “When they act against the state of Israel, there must be a response.”

The Palestinian Authority did not immediately respond, but Palestinian officials have previously condemned Israel’s withholding of Palestinian tax revenues it collects as “piracy.”

Israel also recalled its ambassadors from Spain, Ireland and Norway for consultations on Wednesday morning. Israel Katz, the Israeli foreign minister, said he had summoned the countries’ envoys to Israel for a “severe scolding” following “their governments’ decision to award a gold medal to Hamas terrorists.”

Mr. Netanyahu’s office did not respond to a request for comment on Mr. Smotrich’s statement, nor did it immediately comment on the European countries’ announcements.

Under decades-old agreements, Israel collects customs and import taxes on behalf of the Palestinian Authority. Those revenues constitute most of the Palestinian budget, particularly as international aid has declined. But Mr. Smotrich — who has labeled the Palestinian Authority “an enemy” — had already delayed transferring the latest tranche of funds before the announcements on Wednesday, said Mr. Fuld and a Palestinian official. The Palestinian official spoke on condition of anonymity because they were not authorized to discuss the matter publicly.

The Ramallah-based Palestinian Authority is already in a severe financial crisis following tightened Israeli restrictions on its funding and a depressed West Bank economy stemming from the war. This month, it managed to pay only 50 percent of the salaries of tens of thousands of civil servants.

Diplomats and analysts have warned that the Palestinian government’s deepening financial problems could lead to further unrest in the Israeli-occupied West Bank. More than 500 Palestinians have been killed in the territory, many in clashes with Israeli forces, since the Hamas-led attack on Oct. 7 prompted Israel to go to war in Gaza, according to the Palestinian Authority Health Ministry.

Palestinians have faced tightening Israeli restrictions since Oct. 7. Over 100,000 Palestinians who worked in Israel were barred from entering, creating mass unemployment overnight. Near-nightly raids, Israeli road closures, and stricter checkpoints have further choked the Palestinian economy.

The Palestinian Authority traditionally disburses some of the tax funds collected by Israel to Gaza. After the war broke out in October, Mr. Smotrich said he would withhold that part from the amount it transfers to the authority. Palestinian officials refused to accept the reduced payments at all in protest.

After a monthslong standoff over the issue, Israeli and Palestinian leaders agreed to a deal stipulating that Norway would hold some of the revenues in trust until Israel agreed they could be sent to the Palestinians. The Palestinians agreed to receive the reduced payments in the meantime.

On Wednesday, Mr. Smotrich called for the government to immediately annul that agreement as well.

Top Israeli officials, including Mr. Netanyahu, have repeatedly excoriated international recognition of a Palestinian state as a “prize for terrorism” after the Oct. 7 attack.

Most of the current hard-line Israeli government rejects the establishment of an independent Palestinian state, practically ruling out peace talks to end Israel’s decades-long occupation.

President Biden and Secretary of State Antony J. Blinken have said that after the war, Gaza should be unified with the West Bank under a “revitalized” Palestinian Authority. Israel has remained vehemently opposed to that idea. The authority in its current form is also unpopular among Palestinians, who view it as complicit in Israel’s occupation.