By Steven Scheer
JERUSALEM, Jan 2 (Reuters) - Israel will meet tough budget targets it has set for this year and rely overwhelmingly on spending cuts rather than more tax hikes to do so, Finance Minister Yuval Steinitz said on Wednesday.
The government passed a 14 billion shekel ($3.8 billion) package of income and sales tax increases over the past year but has also agreed on wage settlements for state employees and other commitments that have taken its spending beyond mandated limits.
To compensate for that, it will have to push through a second fiscal package of the same value to hit a deficit goal it has set at 3 percent of economic output.
Steinitz said that target was 'difficult ...but not unprecedented.'
'In 2003 and also in 2009 we had to have similar adjustments ...and we did it....We will meet the deficit target in 2013,' he told Reuters.
Many analysts agree with the head of Israel's central bank that Steinitz will have to introduce more tax hikes to keep the deficit within limits, but the minister played down that option.
'I already delivered a package of 14 billion shekels of additional taxation and I hope there will not be a need for (further) taxes,' Steinitz said. 'If needed, it will be a very, very modest adjustment.'
Bank of Israel Governor Stanley Fischer has said the deficit may reach near 4 percent of GDP without tax increases.
Israel holds parliamentary elections on Jan. 22, which polls show the right-wing Likud party of Steinitz and Prime Minister Prime Minister Benjamin will easily win.
Steinitz said there was a good chance he would remain as finance minister in the next government.
Likud's economic policies have come under fire from political rivals seeking to capitalise on a wave of popular discontent as increasing numbers of citizens struggle to make ends meet as housing, food and fuel costs rise sharply.
Steinitz brushed off the criticism.
'Israelis are never fully satisfied,' he said, pointing to data showing 14 percent economic growth over the past three years, a jobless rate that has fallen to 6.7 percent from 9.5 percent since the start of the global financial crisis, and a near 40 percent jump in direct investments.
'If we had unemployment of 10, 12, or 20 percent, then people would feel it,' he said. 'The most important thing the government did was to enhance economic growth and create jobs.'
The finance ministry forecasts Israel's economy will grow 3.5 percent in 2013, including the start of natural gas production. The Bank of Israel sees 3.8 percent, or 2.8 percent excluding gas.
Steinitz said house prices - which soared in recent years but have now stabilised - remain a big problem for Israel's economy, even though the government has stepped up its home-building programme.
'For many years we built too few apartments,' Steinitz said. 'Now, we increased it dramatically... Housing prices have not gone up for the last year or so but they aren't going down. We need a year or so until prices go down.'
($1 = 3.72 shekels)
(Editing by John Stonestreet) Keywords: ISRAEL ECONOMY/FINMIN
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