Budget revisions seen after Israel leadership vote

By Steven Scheer

JERUSALEM (Reuters) - Israel's 2009 budget is likely to need revision with spending set to rise, regardless of the outcome of the ruling Kadima party's leadership election on Wednesday.

Opinion polls showed foreign Minister Tzipi Livni leading Transport Minister Shaul Mofaz before an election called to pick a successor to Prime Minister Ehud Olmert who has promised to resign following a corruption investigation.

Olmert could remain in office for weeks or even months until a new government is in place, either through a coalition deal or an early general election, and analysts expect no major changes in fiscal policy if another Kadima-led government is formed.

Still, the record 319 billion shekel ($90 billion) budget that passed a cabinet vote by only 13-12 will have to be revised since the fiscal targets are too optimistic in the current economic and financial market environment, analysts said.

The budget was based on a 2009 growth estimate of 3.5 percent next year and the finance ministry's top economist last week told Reuters he did not see a reason to lower that forecast. Israel's central bank has forecast 3.1 percent growth.

Even before the latest deepening of the global financial crisis, most economists had expected growth to slow to below 3 percent next year and some now see it as low as 2 percent.

"The worst thing would be to force through a budget with current parameters and next year we will see worse (economic) numbers," said Gil Bufman, chief economist at Bank Leumi.

He expressed skepticism about Israel's ability to reach a 2009 budget deficit of 1 percent of gross domestic product.

"At the moment the target is not a true target," he said. "It's wishful thinking."

SPENDING TO RISE

Economists say the current ceiling on annual spending will probably rise by more than 2 percent in 2009, compared with an increase of 1.7 percent this year, as growth slows.

Over the past five years, foreign investors have flocked to Israel and credit rating agencies have raised the country's sovereign rating, largely due to the implementation of key free market reforms and restrained state spending.

A Mofaz victory in the Kadima contest could raise question marks about higher spending. Mofaz, who has the backing of trade unions, was the only Kadima minister who opposed the 2009 budget and called for increased social expenditure.

Livni voted in favor of the budget in the cabinet but has said some changes could still be made to boost spending for Israel's poor.

Still, with traders and investors more fixated on global financial market turmoil than domestic issues, the leadership contest was unlikely to perturb them, analysts said.