JERUSALEM (Reuters) - Israeli Prime Minister Benjamin Netanyahu said on Thursday he would increase the defense budget to meet growing threats but not let the country's credit rating drop one notch through any excessive spending.
Netanyahu is under pressure from the Defense Ministry to increase allocations sharply to help pay for the 50-day war with Hamas in Gaza and confront Islamist militants.
But Finance Ministry and central bank officials are warning that too much defense spending will undermine Israel's fiscal credibility.
Netanyahu told a counter-terrorism conference that Israel's credit rating rose during the global financial crisis, and he would not let that be reversed.
"A lowering of the (sovereign) credit rating one notch will cost the state of Israel 3 billion shekels ($827 million) a year. We need to worry that this won't happen," he said, referring to higher debt servicing costs.
A final decision on a 2015 budget draft is expecting in the coming days.
The Defense Ministry has asked for 9 billion shekels for the rest of this year to cover costs of the Gaza war, which ended on Aug 26, and another 11 billion shekels in 2015. The Finance Ministry believes around 5 billion shekels is sufficient since Israel has other spending needs.
"We need to raise the defense budget. Security comes first," Netanyahu said. "But we have to do it responsibly so that it will not lead to unbridled growth of the budget deficit. We will not raise the deficit excessively."
Standard & Poor's is due to issue an update on Israel's credit rating on Sept. 19.
The agency told Reuters last week Israel's longer-term credit rating depended on its defense costs and the frequency of military conflicts, but a bigger budget deficit expected for 2015 was unlikely to prompt a downgrade.
Elliot Hentov, S&P's primary analyst for Israel, said then the agency had already factored Israel's high defense costs when it raised the rating to A+ in 2011. A+ is well within investment grade.
Finance Minister Yair Lapid has said that most of the Gaza conflict's costs would be absorbed in the 2014 budget so Israel will meet or slightly break above a deficit target of 3 percent of gross domestic product.
He has already raised the 2015 deficit target to at least 3 percent from a prior 2.5 percent of GDP to accommodate higher defense spending.
(1 US dollar = 3.6280 Israeli shekel)
(Reporting by Steven Scheer; Editing by Andrew Heavens)