UPDATE 2-Israel's 2014 budget can absorb cost of Gaza conflict -finance minister

Thu Aug 7, 2014 9:55am EDT

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(Adds Fitch comments)

By Ari Rabinovitch and Steven Scheer

TEL AVIV Aug 7 (Reuters) - Israel's 2014 budget will be able to absorb the costs incurred during the month-long Gaza conflict and there will be no need to increases taxes, Finance Minister Yair Lapid said on Thursday.

It will take a week or two for the government to determine the total impact of the conflict on the economy, Lapid said, both in terms of military spending and damage to business.

Some government officials have estimated the damage to the Israeli economy at more than 10 billion shekels ($2.89 billion), with one newspaper putting it above 12 billion shekels.

The Bank of Israel has said growth in 2014 - forecast at 2.9 percent - could be harmed by as much as half a percentage point, while the tourism industry could lose some $500 million in the third quarter. Tourism Minister Uzi Landau said he expected a quick recovery.

A 72-hour truce took effect on Tuesday after heavy fighting that began on July 8, and Lapid said Israel was making all diplomatic efforts to ensure that things remained quiet.

"Israel has a very strong, sustainable economy. We are more than capable to digest this operation into the 2014 budget," Lapid, speaking in English, told Reuters.

"Of course it's an expense we didn't expect, but then again, why have a strong economy if not for these occasions in which you have to react to the unexpected."

Lapid earlier told a news conference: "Taxes will not be raised."

He noted that the budget deficit target for 2014 was 3 percent, and that prior to the month-long military operation, the deficit was running at less than 2.6 percent.

"This means we have room below the target for unexpected expenses," he said.

Lapid said the government was acting swiftly to compensate local businesses that were hurt during the military campaign and acknowledged that fresh discussions would be held ahead of the 2015 budget to address any changes in spending priorities, including new defence requirements.

Credit ratings agency Fitch said the fiscal and economic cost of Israel's incursion into Gaza may cause the government to narrowly miss its budget deficit target this year, but that better than expected performance in the first half of the year would help offset the impact.

"Beyond the one-off costs of this operation, the renewed conflict with Hamas may add to pressure to increase defence spending, limiting fiscal flexibility," Fitch said in a report published on Thursday.

It cited Finance Ministry estimates that spending could rise 0.3-0.6 percent of GDP, and could be spread across budgets for this year and next. The impact on revenues, though, is harder to predict and depends on any wider economic fallout, Fitch added.

Fitch rates Israel as "A" with a positive outlook.

The central bank has said that to meet a budget deficit target of 2.5 percent of GDP in 2015, the state needs to cut spending and bring in tax income of 20 billion shekels. (1 US dollar = 3.4573 Israeli shekel) (Editing by Robin Pomeroy)

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