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In a very weak economy when you say 'cut government spending ' what you mean is you're laying off school teachers and you're de-funding various programs that put money into the economy. This means you have more unemployed people that then draw unemployment benefits and don't pay taxes.

You can set up whatever negotiations or structure you want but until the Palestinians are willing to accept the fact as the majority of Israelis do that there should be two states between the Jordan and the Mediterranean we won't have peace.