TEL AVIV (Reuters) - Israel's cabinet on Sunday approved a Finance Ministry proposal to tighten spending limits on the government's budget starting in 2015.
As a result, government spending in 2015 will rise by only 2.6 percent instead of the original target of 4 percent.
"The meaning of this measure is the prevention of a dramatic increase in taxes and the prevention of a swelling of government expenditure beyond what is needed," Finance Minister Yair Lapid said in a statement.
The new expenditure rule will be determined by a formula based on population growth in the three years prior to the budget as well as the desired level of debt to gross domestic product - 50 percent - divided by the actual debt to GDP level.
Debt to GDP is currently at 68 percent.
The Finance Ministry has forecast a budget deficit of 3 percent of GDP in 2013 and 2014. The 2013 budget deficit is expected to be well below a 4.3 percent target due to higher than expected tax income and lower than expected spending.
Due to the improved fiscal position, the government canceled across-the-board income tax hikes planned for January.
Following the cancellation of the tax hikes, the Bank of Israel cast doubt on the government's ability to meet a 2015 budget deficit target of 2.5 percent of GDP. The bank said extensive policy measures such as higher taxes or a contraction in expenses would be needed.
On Sunday the central bank said it supported slowing the rate of growth of public expenditure.
"This is in view of the assessment that the growth potential of the economy in the next few years, against the background of demographic changes, is expected to be lower than it was in the past decade," it said in a statement.
But it said an adjustment in the budget should also come from an increase in tax revenues since public expenditure in Israel is already not high while the tax burden is low, compared with other advanced countries.
(Reporting by Tova Cohen)