Israel budget deficit dents Netanyahu's "Mr Economy" image

JERUSALEM Mon Jan 14, 2013 3:39pm GMT

JERUSALEM (Reuters) - Figures showing Israel's budget ran a much higher deficit than expected last year have dented Prime Minister Benjamin Netanyahu's claim to skilful economic management just over a week before a general election.

Netanyahu often points to years of strong growth at a time of global slowdown in a campaign for re-election that he is widely predicted to win.

But the right-wing leader's rivals have pounced on Sunday's news that the budget deficit rose to 4.2 percent of gross domestic product in 2012 - double the original estimate, though most economists had realised the likely scale of the overshoot.

It means the government had a 39 billion shekel ($10.5 billion) hole in its budget last year, despite spending cuts and tax rises, and will need to take more such measures in 2013.

"Netanyahu's government and its faulty and politicised priorities are leading Israel into bankruptcy," said Tzipi Livni, a former foreign minister and head of the centrist Hatenuah party hoping to unseat him on January 22.

Shelly Yachimovich, who leads the left-leaning and social-minded Labour Party, said: "Tell me how much longer he can keep calling himself Mr Economy."

Even the far-right Naftali Bennett, widely seen as a likely partner in a Netanyahu-led coalition after the ballot, branded his budget management irresponsible.

Playing down the budget overshoot, which stemmed largely from a shortfall in tax income, Netanyahu said: "I don't think this will have significant ramifications for Israeli citizens."

The next batch of public opinion polls, due later this week, could indicate whether the data will translate into lost votes.

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As finance minister a decade ago, Netanyahu became known as "Mr Economy" for shifting Israel to a free-market economy, while chopping state spending and leading a privatisation drive.

During the global downturn, Israel's economy has been among the fastest growing of Western countries, reaching 3.3 percent in 2012 after a 4.6 percent spurt in 2011, with expectations of close to 3 percent again this year.

But the budget may have exposed Netanyahu's vulnerability, after he agreed to spend well beyond legal limits in order to keep coalition partners happy. A slowing economy led to a nearly 14 billion shekel ($3.75 billion) shortfall in tax income.

No one party has ever won a parliamentary majority in Israel's history and local media speculate that Netanyahu may turn to centrist parties for political partnerships.

His traditional coalition allies, ultra-Orthodox parties, have typically demanded hefty state stipends for Jewish religious institutions, putting a strain on the budget.

Standard & Poor's sovereign credit analyst Elliot Hentov said he had long expected Israel's budget deficit to top 4 percent of GDP in 2012 since the government has a poor track record of late in projecting tax revenue.

"Given that growth has been satisfactory, if not strong, that makes the deficit all the more disappointing," Hentov told Reuters earlier this month.

Financial commentator Nehemia Strasler said that while the government had allowed "waste and reckless spending" over the past two years, Yachimovich and other opposition leaders bore some responsibility since so much of the spending spree was sparked by social protests.

"They supported, encouraged and applauded every time the Netanyahu government increased spending," Strasler wrote in Monday's Haaretz daily. "In fact, they wanted even higher salaries, larger budgets and more extensive grants. How can they complain now about the deficit?"

($1 = 3.73 shekels)

(Editing by Ari Rabinovitch/Ruth Pitchford)

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