By Steven Scheer
JERUSALEM, Sept 12 (Reuters) - Israel's budget deficit is likely to drop below 3% of gross domestic product in 2020 after an increase this year, the director general of the Finance Ministry said.
Higher state expenses and lower than expected tax collection pushed the deficit close to 4% so far in 2019, above an initial target of 2.9% -- its 2018 level.
But the ministry dismisses talk of a crisis by some analysts and politicians. Economic growth remains above 3% even though tax income this year looks set to be about 7.5 billion shekels ($2.1 billion) lower than projected.
"We need to fix it but it is not a catastrophe and is not affecting the economy," Shai Babad told Reuters in an interview, adding that the 2019 deficit was likely to be 3.6-3.8% of GDP.
The ministry has started preparing for what is likely to be a dual-year 2020-2021 budget, but much is on hold because Israel is holding its second general election of the year next week.
Prime Minister Benjamin Netanyahu failed to form a ruling coalition after the April election. Holding another election has made it almost impossible to enact measures to rein in the budget, delaying a parliamentary vote of approval on next year's budget.
Babad said it was too soon to say what the deficit target would be in the next budget because much depends on the election, who will be finance minister and what the minister's agenda will be. If Netanyahu wins another term, Moshe Kahlon could keep the post.
"I believe the deficit (target in 2020) will be somewhere between 2.7% and 2.9%. Then, accordingly, the adjustment that will have to be (made) will be somewhere between 15 billion and 20 billion shekels," Babad said.
"It's a 400 billion shekel budget. We have to make an adjustment of four, five percent. In the past, we have done harsher adjustments."
Babad declined to say what steps would be taken but said Israel's bloated public sector would benefit from a trim. Israeli media say raising value added tax (VAT) to 18% from 17% is likely because it would bring in 5 billion shekels a year.
"The steps we will take will promote growth and help us close the gap," he said. "The steps don't only have to come from revenues. Government is not the most efficient sector in the Israeli economy."
Babad said one positive from the higher deficit has been a jump in civil - or non-defence - spending, in which Israel lags most other Western countries. "There has been a shift and for the first time civil expenses have gone up at a higher rate than defence expenses."
COST OF LIVING
Babad expects the next government to vote on the new budget in January, with final parliamentary approval in March.
Although a special programme to subsidise housing prices for some first-time buyers was a pet project of Kahlon, Babad wants the programme continued whoever is finance minister.
"It's not a long-term solution but a short-term solution" to contain housing costs, Babad said. "The answer to the long-term solution is supply, supply, supply."
Housing prices more than doubled in the last decade but have stabilised after four years of efforts to reduce bureaucracy and streamline the building approval process.
The high cost of living, and housing in particular, has been a problem for the government in recent years. Reforms to open various sectors to competition have been enacted while customs taxes on some products have been reduced
Yet prices on milk and agriculture remain high in the hope of appeasing local producers. Babad said he favours completely opening the market and that more steps will be taken to reduce costs.
"It's more justified to open the market to competition to reduce prices for 8 million people than to close it and protect 8-10,000 farmers," he said, while supporting the need for some subsidies would be needed for farmers and local producers.
Babad also said the ministry was looking at expanding incentives for young ultra-Orthodox men to do vocational and engineering courses to encourage more to join the workforce.
"If we don't take steps today to make sure they join the labour force, we won't be talking 3-4% (economic) growth," he said. "We will be talking about very severe problems."
($1 = 3.5396 shekels)
(Editing by Timothy Heritage)
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