* Finance Ministry seeks cuts to defence budget
* Army calls off drills, public unimpressed
By Maayan Lubell and Steven Scheer
JERUSALEM, June 1 (Reuters) - Israel's Defence Ministry has for weeks been engaged in a public battle with the Finance Ministry, which is seeking to slash Israel's largest budget and dismisses warnings that cuts will make it harder to protect the Jewish state.
The Treasury is seeking an $870 million cut in defence funds, which at about $14.5 billion make up some 17 percent of Israel's total budget. The Defence Ministry in turn has cautioned it will Israel's security will be compromised unless its funding is increased.
The row has pitted defence and finance officials against each other, making mutual threats in the media. Some see it as a sign of change in Israel's attitude toward its military, once the nation's sacred cow.
As the debate continued, defence sources said on Sunday the air force had halted many training flights over budgetary constraints - a move that some commentators dismissed as a scare tactic.
"After several years of false alarms, the defence apparatus is now finding it hard to persuade the government that this time the wolf has really come to prey on the herd," wrote Amos Harel, Haaretz newspaper's defence analyst.
"The citizenry is not impressed by the generals' threats."
Back in the 1970s, Israel's defence budget represented about 30 percent of GDP. In a growing Israeli economy, it now stands at some seven percent, a figure still far higher than in Western countries.
Israel's Finance Minister Yair Lapid has vowed not to cater to Defence Ministry demands. "The equation is simple: any addition will come at the expense of the public," he said.
Lapid's Yesh Atid party was carried to second place in the 2013 election on the wings of middle class uproar over high living costs. The vote was seen as a shift in national concerns, from matters of war and peace to bread and butter issues.
"There is now an idea that security does not only mean defence budget. People understand that education and health and social services are security as well," said Yesh Atid lawmaker Ofer Shelah, who is a member of both the Finance and Foreign Affairs and Defence committees in the Knesset.
"It is a growing debate that was once considered sacrilegious in Israel," Shelah said.
DRILL DELAYED
In May, Defence Minister Moshe Yaalon, citing funding issues, called off a major homefront military drill.
"Delaying the drill is the first step on the way to an almost complete halt of military and defence training because of budget constraints. This is not a game and we are not instilling fear," a senior defence official said in the announcement.
But Yaacov Lifshitz, of the Begin-Sadat Center for Strategic Studies, believes the Defence Ministry should be more responsible with its financial resources and questioned whether the public would accept such an argument.
"On the face of it this announcement is creating some antagonism. We are talking about a budget of 60 billion Shekels ($17.3 billion) ... what's to stop the air force from training?"
The $14.5 billion defence budget is a base figure supplemented by additional revenues and additional government funding approved during the year. Another $3 billion in aid comes from the United States.
And Finance Ministry officials say cuts can be made elsewhere, especially to generous pensions paid to officers who often retire in their 40's and then embark on a second career.
A government panel, appointed in 2007, drew up a 10-year defence budget, but the plan was only partly implemented. Prime Minister Benjamin Netanyahu has appointed a new committee but it has not yet begun working and it is doubtful any findings can be delivered in time for the 2015 budget.
Maharan Frozenfar, who served as the financial adviser to the army's chief of staff and Defence Ministry until 2011, said an imperfect multi-year plan would still be better than quarterly quarrels between the defence and finance ministries.
"Instead of looking to the long term and saying we want defence spending to be like in other Western countries, and setting a multi-year plan steadily over time, what do we do? We haggle and arm wrestle," he said.
Netanyahu issued a statement on Wednesday in which he urged both sides to stop bickering and hold "a substantive discussion" until he makes his decision in the coming weeks.
In past years the finance ministry has succeeded in cutting the defence budget, defence officials have tended to request more funds after the budget was approved. Following a public debate, the prime minister usually approved the increases.
Last December, Israel's parliamentary finance committee approved 3.27 billion shekels of additional funding for defence, on top of a 2.75 billion shekel boost approved two months earlier.
($1 = 3.4724 Israeli Shekels) (Writing by Maayan Lubell; Editing by Jeffrey Heller and Raissa Kasolowsky)
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