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UPDATE 1-Israel's finance minister blames higher deficit on tax forecast errors by his own ministry

Steven Scheer and Ari Rabinovitch

errors by his own ministry@ (Adds comments)

JERUSALEM, Sept 23 (Reuters) - Israeli Finance Minister Moshe Kahlon said on Monday that the budget deficit would be higher than expected this year because his own ministry had misjudged tax income, which has fallen short of estimates.

Kahlon has come under fire from economists who say that he and Prime Minister Benjamin Netanyahu increased spending on state subsidies for day care and other services, and gave pay rises to police and other public servants, while cutting taxes at the same time.

Kahlon said the government now expects the 2019 deficit would be 3.5-3.6% of gross domestic product, above an initial target of 2.9, but placed the blame for the gap on his ministry's economists, saying they overestimated government income this year.

"What happened with the deficit was a mistake with forecasts. It wasn't a mistake that we spent the money. We didn't spend the money. There was simply a mistake in forecasts," Kahlon told a news conference.

Shira Greenberg, the ministry's chief economist, swiftly rejected that assessment, saying the estimates were relevant when they were made and that there were issues with the budget's implementation and the global economy had since weakened and affected Israel's growth and tax income. She has said that tax revenue will fall short by some 7.5 billion shekels ($2.1 billion) this year.

Kahlon, whose position as finance minister is up in the air in the wake of last Tuesday's election, said big steps to rein in the deficit would only be made once a government was formed.

Last week, Shai Babad, the ministry's director general, told Reuters the adjustment in the budget to bring down the deficit would be between 15 billion and 20 billion shekels.

The central bank has said there needs to be both spending reductions and tax increases, although Kahlon said "that raising taxes is the last thing that needs to be done."

A national unity government could emerge following the election, in which no single party won a majority.

Failure to form a new government in Israel or the formation of a "disparate" coalition would hurt the countrys credit profile, rating agency Moodys said last week.

Kahlon said he sought to remain as finance minister in the next government and that the budget for 2020 would not be ready until early next year.

"Regarding the budget deficit, we've known larger ones in the past," he said. "If there had not been two elections we would already be in a different place. No doubt the deficit now, at least until the end of the year ... is on a downward trend."

Israels economy has been in a holding pattern since a first inconclusive election in April. Limited in power, the caretaker government was unable to take major steps to lower the deficit. ($1 = 3.5128 shekels) (Reporting by Steven Scheer and Ari Rabinovitch; Editing by Susan Fenton)