Steinitz eyes cutting budget deficit to 2% of GDP by 2012

Israel targets a budget deficit of 3% of gross domestic product in 2011 and 2% in 2012, down from a forecast deficit of 5.5% of GDP in 2010, according to budget proposals presented by Finance Minister Yuval Steinitz to the cabinet on Tuesday.

The Bank of Israel, however, sees the 2010 deficit at closer to 4% as the economy is rebounding.

Overall, spending will grow 2.66% to NIS 264.7 billion (about $68 billion) in 2011, and another 2.66% to 271.7 billion ($70 billion) in 2012, according to the proposed budget, which covers both 2011 and 2012.

"Approval of the budget will transmit to the economy that the political system is determined to preserve responsible economic policies," Steinitz said in a statement.

"In all of the Western world cuts are being made, salaries lowered and taxes raised but thanks to the policies we carried out in the previous two-year budget the state of Israel can allow itself to increase the budget in a controlled manner."

Reductions and adjustments

The minister said he would raise the defense allocation modestly and invest in growth engines such as infrastructure development and advancing high-tech industries. To help low-wage earners, he plans to expand implementation of a negative income tax.

Steinitz said not all the demands of the various ministries could be met and certain reductions and adjustments would have to be made.

To reach the deficit targets, cuts of NIS 5.6 billion ($1.4 billion) will be needed over the next two years. The defense budget, for example, would grow by NIS 1.98 billion ($508 million) in 2011, NIS 1.4 billion ($360 million) less than had been required from previous decisions.

The budget needs cabinet and parliamentary approval.

The 2011 budget is based on expected economic growth of 3.8% and the 2012 budget on estimated growth of 4%. Revenue from taxes is estimated at NIS 232.8 billion ($60 billion) in 2011 and NIS 248.5 billion ($64 billion) in 2012.

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