By Steven Scheer

JERUSALEM (Reuters) - Israel's budget deficit is projected to be at least 4% of gross domestic product in the next few years if the government does not make tax and spending adjustments of tens of billions of shekels, the Finance Ministry said in a report on Sunday.

A year-long political stalemate has made it difficult to take proper fiscal steps since the caretaker governments are limited in power. A third election in less than a year in March would mean a 2020 state budget would not be approved until at least the middle of the year.

In the meantime, a pro-rated version of the 2019 budget is being used.

Israel posted a budget deficit of 3.7% of GDP in 2019, above an initial target of 2.9%.

Finance Minister Moshe 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 has placed the blame for the gap on his ministry’s economists, saying they overestimated government income.

Analysts expect a similar deficit in 2020.

The Finance Ministry said that in 2021 the deficit would reach 4.2% of GDP unless it makes 30 billion shekels ($8.7 billion) of tax hikes and/or spending reductions. The target is 2.25% of GDP and the next government will likely raise it.

To meet a 2% of GDP target in 2022, 33 billion shekels of adjustments are necessary, the ministry said.

For 2020, the ministry expects tax income of 330.2 billion shekels, 1 billion less than in its prior estimate in June but above 2019 revenue of 317.4 billion shekels.

The ministry also trimmed its 2020 economic growth estimate to 3% from 3.2% in its prior forecast, with the decline mainly due to expectations of weaker growth in investment and private spending.

Last week, the Bank of Israel said growth this year would be 2.9% -- with 0.3% of the growth coming from natural gas production at the new Leviathan field.

The ministry projects stable growth of 2.9% to 3% between 2021 and 2023.

($1 = 3.4656 shekels)

(Reporting by Steven Scheer; Editing by Elaine Hardcastle)