In August 2011, a report by the Knesset’s Foreign Affairs and Defense Committee hailed the Palestinian Authority’s “comprehensive security coordination” with Israel in thwarting terrorist attacks — a judgment echoed in May 2012 by the chief of the Shin Bet, Israel’s domestic intelligence agency. “The security coordination with the P.A. is good,” Yoram Cohen told the same committee then.

But Cohen warned the lawmakers that Palestinian security cooperation in the Israeli-occupied West Bank was “highly affected by the atmosphere on the street, public opinion and state of the economy.”

Now, even as post-election negotiations over the next government consume the country, Prime Minister Benjamin Netanyahu’s decision to withhold tax revenues that Israel collects for the P.A. is directly undermining the livelihoods of the security men coordinating with Israel’s own security forces.

The P.A.’s estimated 165,000 employees, including its security forces, are not receiving their monthly paychecks, because of the impact on government coffers of Israel’s tax withholdings and of reductions in recent years of international aid. And the same dual hits have sent the Palestinian economy into just the kind of downward spiral of which Cohen warned.

In the heavily government-dependent P.A. economy, these employees and the money they spend form the economic backbone of the occupied territory.

In an appliance store at the southern entrance to Ramallah, shop manager Hazem Shuleh, 24, shows a visitor bounced checks that P.A. employees have been giving him, including one from an intelligence officer who was unable to cover his installment payments for a refrigerator because he has not received his full salary since November.

“I called the officer and told him I need the money, that I need to pay the supplier,” Shuleh told the Forward. “He said: ‘I don’t have it. Be patient.’ I end up eating air.’’

Another returned check belonged to a P.A. policeman, Shuleh said.

Israeli officials are declining to specify when seized tax revenues vital for the Palestinian economy will once again be transferred to the P.A.

Israel halted the transfers, amounting to about $120 million a month, beginning last November in reprisal for the P.A.’s successful bid then for Palestinian statehood recognition at the United Nations. Israel saw the bid as a unilateral move that violated Israeli-Palestinian peace agreements.

Asked what sense the Israeli revenue cutoff made, one foreign ministry official said to the Forward: “Are you a parent? It’s called reinforcing behavior. I don’t want to sound paternalistic here. But there has got to be some price for their conduct.”

The ripple effect of missed salaries is easily discernible at small businesses throughout the West Bank. Shuleh, wearing a jacket and scarf inside his frigid store, says sales are less than half of what they were at this time last year. The reason, he explained, is the disruption in salaries of the P.A.’s teachers, doctors, secretaries, bureaucrats and other workers. It’s a convulsion particularly weighty in Ramallah, the seat of the P.A.’s government.

“People don’t want to spend the little money they do have,” he said. “They fear future times will be even worse.”

Economic distress is nothing new for Palestinians; their economy has always been subject to the vicissitudes of the conflict with Israel and of Israeli-imposed constraints on the movement of people and goods.

Even the electromagnetic spectrum is controlled by Israel, something that has stunted the growth of Palestinian telecommunications. Israel’s control of water resources has similarly limited the growth of Palestinian agriculture. But with Israel’s targeting of the P.A.’s salary regime, the minimal safety net is now being lost.

Hisham Awartani, an economist who was trained in the United States and teaches at an-Najah National University, in Nablus, said that Palestinians in the West Bank are currently going through the worst economic crisis since the launch of Palestinian self-rule in 1994.

In the past, he said, the P.A. salaries, which are estimated to directly support one-fourth of the population, constituted a monthly “blood transfusion” for the economy.

“Do they think they’re punishing the P.A. leadership?“ Awartani asked. “It’s the people in the streets who are being punished by Israel.”

Israeli officials counter that fallout from the tax transfer suspension is the responsibility of the Palestinian leadership, since it chose to go to the U.N. in violation of an agreed principle that all outstanding differences would be resolved through bilateral negotiations.

“The transfer of tax payments is made in the framework of signed agreements,” Mark Regev, spokesman for Netanyahu, told the Forward. “The Palestinian leadership must understand that if it violates signed agreements, Israel reserves the right to respond.”

The tax transfer suspension hit an economy that was already reeling, and a P.A. that was already gasping, in large measure because of a steep decline in foreign donations — to $750 million dollars in 2011 and 2012 from $1.8 billion in 2008.

The World Bank said in a report last September that a chief prerequisite for the Palestinians moving toward a sustainable economy would be Israel’s allowing them to develop the sector designated as Area C, the relatively resource-rich 60% of the West Bank under direct Israeli control, where all of the Jewish settlements are located. But things are moving in the opposite direction. The settlements are expanding, and right-wing legislators such as Danny Danon of the Likud Party are calling for the settlements and open land in the West Bank to be annexed.

Meanwhile, the P.A. is struggling to maintain basic services such as schools and health in the face of strikes by employees over not getting paid or getting paid too little.

In the village of al-Khader, near Bethlehem, some P.A.-employed teachers stopped going to school because they could not afford the travel expenses, Mayor Tawfiq Salah related. “At the same time,” he said, “the pupil asks, ‘Why didn’t father give me money so I can buy in the canteen?’ So even the little ones are thinking about the economic problems.”

The construction sector, once an engine of the economy, “is moving at 30% of its capacity” because the government is not starting new projects and because people don’t have money to buy apartments, according to Adel Odah, head of the Palestinian Contractors Union.

Odah told the Forward that his construction company, Adel Bader which built schools in the Ramallah area and used to employ 60 workers, is now completely inactive. “I’m surviving from my savings. I can live for another year, no problem,” he said.

But Odah realizes that most people are not as fortunate. He predicts that the desperation — if it continues — will erupt in violence. “We cannot know exactly what kind of trouble, but there will be trouble,” he said. “It will be a disaster not only for us, but also for the Israelis.”

Among Palestinians, there is a wide perception that Hamas — the militant rival of the Fatah party, which controls the P.A. — emerged victorious from the Gaza conflict of last year and won concessions from Israel through its use of armed force. This only exacerbates the situation. In 2011, Hamas, which rejects Israel’s legitimacy, also won the release of 1,027 Palestinian security prisoners in exchange for its release of Israeli soldier Gilad Shalit, whom the group seized in 2006.

Hamas’s indirect negotiations with Israel via Egypt in each of these episodes contrast with the lack of negotiations between Israel and the P.A., for which each side blames the other. Hamas’s perceived victories have radicalized public opinion and rendered P.A. President Mahmoud Abbas’s strategy of negotiation and diplomacy less popular.

In this environment, Israel’s policy of withholding tax revenues “is endangering the P.A., whose existence is an Israeli interest,” said Gadi Zohar, a retired general who headed Israel’s military administration in the West Bank and Gaza. “If the authority falls, Israel will have to provide services to the population, and the budgetary burden will fall on Israel. The Palestinian security forces, which have been a major component in keeping the calm, will be dispersed and won’t do their job. It will fall on the army.”

“Whether by design or not,” Zohar said, Israeli policy in recent years has been strengthening Hamas at the expense of Abbas. With further economic deterioration, he warned, “we might one day see an attempt by Hamas to do what it did in Gaza,” where it staged an armed takeover in 2007. “Weakening of the P.A. strengthens Hamas.”

Regev denied that Israel’s policies were having any such effect. The real problem, he said, is Abbas’s refusal to negotiate with Netanyahu unless Israel institutes a comprehensive freeze on expanding its settlements in the West Bank during these talks.

“We could be in a very different place today had Abbas and the P.A. not rejected the path for peace,” Regev said. “They have failed to get anything, because they haven’t negotiated.”

Assistant managing editor Larry Cohler-Esses contributed to this story.

Contact Ben Lynfield at feedback@forward.com