JERUSALEM, May 13 (Reuters) - Israel's cabinet on Wednesday approved the state budgets for 2009 and 2010, Prime Minister Benjamin Netanyahu's office said.
After days of intense negotiations and deals with ministers and labour unions, the cabinet voted 26-4 to approve a spending package that did not have as many budget cuts as Netanyahu had initially planned.
The budget next heads to parliament, where final passage is expected by mid-July.
The Finance Ministry said the 2009 budget will amount to 316.5 billion shekels ($77.4 billion) with a deficit of 6 percent of gross domestic product. The deficit in 2010 will fall to 5.5 percent when the budget will total 321.5 billion shekels.
Although the increase in government spending was supposed to be capped at 1.7 percent, another 1.35 percent will be added in 2009 and 2010. The ceiling on spending will return to 1.7 percent in 2011.
Finance Minister Yuval Steinitz said the government has approved the "brake and boom" stimulus plan unveiled last month, aimed at boosting employment and jump-starting growth.
"I am happy that we have achieved our goals and formulated a package deal with industrialists and the Histadrut (labour federation)," he said in a statement.
Netanyahu, the architect of free market reforms in 2003, took over as prime minister six weeks ago, promising to keep a tight rein on spending and to cut taxes to bolster an export-dependent econony hit by the global downturn.
But ahead of the cabinet vote, Netanyahu made a number of deals -- notably one with the labour federation -- to raise spending rather than make big cuts.
Netanyahu's broad coalition is made up of a number of parties, each representing a different segment that demands funds.
The package deal includes reforms in Israel's port, electricity and property sectors.
It will help create jobs by adding 900 million shekels to the budget for the Chief Scientist's Office, which assists high-tech firms, and 900 million shekels for the encouragement of capital investment over two years.
The plan includes a freeze on some transfer payments for public sector workers, which will free up 1.7 billion shekels for the government, and an increase in the value added tax to 16.5 percent from 15.5 percent for an 18-month period.
A VAT exemption for fruit and vegetables will be cancelled.
($1 = 4.09 shekels)
(Reporting by Ari Rabinovitch and Tova Cohen; editing by Stephen Nisbet)