Israel's cabinet on Friday unanimously approved a draft budget for both 2017 and 2018 aimed at boosting economic growth but which the central bank has said is too expansionary.
The two-year budget includes safeguards that will allow the 2018 budget to be reassessed next year if initial economic and fiscal forecasts are missed, with a provision for spending cuts if necessary to reach the deficit target.
"The budget will encourage investment, increase competition and lower the cost of living," Prime Minister Benjamin Netanyahu told ministers ahead of the vote.
He said the budget lowers taxes, which will lead people to invest, while various areas of regulation will be eased.
"Regulation is strangling the economy. We are opening the economy," Netanyahu said, without elaborating.
Finance Minister Moshe Kahlon raised the deficit targets to 2.9 percent of gross domestic product for both years from initial targets of 2.5 and 2.25 percent, respectively, to allow for much more spending.
Spending typically rises for political reasons such as keeping the ruling coalition parties happy. Netanyahu sought a two-year budget partly to stabilize his fractious right-wing coalition, which controls 67 of parliament's 120 seats.
The deficit for 2016 is expected to be below 2.5 percent of GDP due to strong tax revenue.
The ministry forecasts economic growth of 2.7 percent in 2017 and 2.8 percent in 2018. Growth this year is projected at 2.5 percent.
The Bank of Israel has called on the government to rein in spending. It said this week that the government was using accounting adjustments, one-off transfers, switching revenue between years and spreading expenses because it was having trouble meeting its stated objectives.
"The deficit targets were raised, despite the fact that the current economic environment is actually contributing to higher tax revenues, and therefore to a lower deficit," Governor Karnit Flug said at the cabinet meeting that convened on Thursday and approved the plan on Friday morning.
"The new deficit target is expected to lead to a moderate but prolonged increase in the debt to GDP ratio in the next few years," she said.
It also "exposes the economy to the risk of a significant increase in the deficit and in the debt to GDP ratio if macroeconomic developments are less positive, even slightly, than those that appear in the base scenario of the forecast upon which the budget was constructed."
Flug said that some of the extra tax revenue may be temporary and that raising the deficit target when the economy is close to full employment may make it harder for fiscal policy in future to support the economy when conditions turn less favorable.
After cabinet approval the budget bill heads to parliament for the first of three votes. It is expected to pass its final reading by the end of the year.
REUTERS