By Tova Cohen
TEL AVIV, June 24 (Reuters) - Israel's cabinet on Monday approved budget adjustments including a spending cut of 1.2 billion shekels ($333 million) in 2019-2020 in an effort to curb a spiralling deficit.
The reductions will affect all the government's ministries. Some of the funds will be redirected to finance a "security project of unparalleled importance", Prime Minister Benjamin Netanyahu said.
They will also pay for subsidies for after-school care and support homeowners affected by recent fires.
"This is very hard for all of us, it is what is necessary. We have no choice," Netanyahu said. "We must see to the priorities – security, the homes that went up in flames, the afternoon daycare – these are the needs which, as of now, we must put before others."
The Finance Ministry this month proposed temporary fixes to lower the deficit including capping tax breaks on luxury hybrid and plug-in cars.
"Israel is part of the global economy and there is a slowdown in the global economy that led to a drop in government revenue and requires us to make adjustments," Finance Minister Moshe Kahlon said at the meeting.
Israel has been facing calls from its central bank and the International Monetary Fund to limit spending and raise taxes after it loosened fiscal policy for a few years.
The opportunity to significantly raise taxes or cut spending was lost after Netanyahu failed to form a new coalition following an April election. He now leads a caretaker government with limited powers and a second ballot is set for September.
"The measures presented by the Finance Ministry are important even if they are modest in relation to the scope of the problem of the structural deficit," Bank of Israel Governor Amir Yaron said.
The Finance Ministry forecasts a budget deficit of 3.8% of gross domestic product in 2020 and in 2021, up from a previous estimate of 3.7% for both years. Both are way above a budget target of 2.5% in 2020 and 2.25% in 2021 mandated by law.
Without the adjustments, the ministry estimated the deficit would reach 4% of GDP in each of the coming two years.
Yaron estimated that without these corrective measures, the deficit would surpass 4.5% of GDP. If the path of the deficit is not corrected, Israel's debt to GDP ratio will exceed 65% in 2022 from 61% in 2018, he said. ($1 = 3.6033 shekels) (Reporting by Tova Cohen, editing by Ed Osmond)