Sun Sep 14, 2014 6:47am EDT
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By Steven Scheer
JERUSALEM, Sept 14 (Reuters) - Israel's Finance Ministry said on Sunday it set a budget deficit target of 3.18 percent of gross domestic product in 2015, higher than an initial aim of 2.5 percent, to accommodate a sharp increase in defence spending.
The ministry delivered next year's budget draft to Prime Minister Benjamin Netanyahu after a delay caused by a 50-day war with Hamas militants in Gaza. The conflict put an unexpected stress on the economy, causing a temporary slowdown in growth and raising new demands from the Defence Ministry.
The Bank of Israel has said its 2014 economic growth forecast of 2.9 percent could be hit by as much as half a percentage point by the fighting, which ended on Aug. 26.
"We see importance in preserving the spending framework," said Yael Andorn, Director-General of the Finance Ministry, in a statement.
"The budget ... reflects the right balances between the budget deficit, demands from the Defence Ministry and the civilian economic agenda," she said.
The ministry did not provide further details of the proposed budget, but it said the framework would not be broken to include new defence spending.
The Defence Ministry has requested an increase in spending of 11 billion shekels ($3 billion) for next year in order to deal with the danger posed by Islamist militants along its borders and a threat it sees from Iran. It also seeks 9 billion shekels extra for 2014 to cover costs of the Gaza war.
By law, total budgetary spending may only be raised by 8 billion shekels for 2015.
The Bank of Israel, in urging fiscal restraint and keeping to a deficit target of no more than 3 percent of GDP, has advocated tax increases to allow for more defence spending but the ministry has rejected any tax hikes while economic growth was slowing.
On Thursday, Netanyahu said the defence budget would be raised but he would not let the country's credit rating fall through excessive spending.
Israel posted a budget deficit of 3.2 percent of GDP in 2013 and is expected to meet or slightly breach a target of 3 percent in 2014.
The budget must be approved by parliament by the end of March or new elections are triggered.
(1 US dollar = 3.6272 Israeli shekel) (Reporting by Steven Scheer; Editing by Ari Rabinovitch and Michael Urquhart)
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