Displaced Palestinians flee following evacuation orders from the Israeli army to leave the Hamad district of Khan Younis, southern Gaza, on Aug. 11, 2024. (Ahmad Salem/Bloomberg)
Israeli Finance Minister Bezalel Smotrich said higher war spending would be financed through budget cutbacks and increased revenues rather than a wider deficit, the outline of a long-delayed fiscal plan.
The target fiscal gap for 2025 will be reduced to 4% of gross domestic product, requiring budgetary adjustments of at least 35 billion shekels ($9.5 billion), Smotrich said at a press conference in Jerusalem on Tuesday. He declined to elaborate, saying he still needs to present his plans to Prime Minister Benjamin Netanyahu and other ministers.
The 2025 budget will be approved in Israel’s parliament by the end of the year, Smotrich said, a deadline technocrats have warned is unrealistic given the structural work still necessary and the lengthy legislation process. Delays have unnerved credit-rating firms and business leaders, who have warned a hiatus will cloud Israel’s economic prospects and elevate the already-high risk premium on its assets.
Smotrich said the fiscal deficit for this year should be 6.6% as planned — unless there are unexpected expenses from the ongoing war with Hamas. The conflict, coming to the end of its 11 month, has put a strain on the economy due to higher defense spending and a hit to GDP growth, mainly in the form of a decline in exports and investments.
“The finance ministry’s annual growth projection for 2024 will likely be lowered soon,” said Smotrich. The estimate is currently 1.9%, though independent institutions see that as too optimistic. Citigroup Inc. analysts are forecasting 1.4%.
Asked whether the government would continue allocating controversial political budgets to be spent at the discretion of coalition party leaders, Smotrich said they should be as low as possible. Those funds, which amounted to some 6 billion shekels this year, have stirred public rage as large portions are spent on religious schools and settlements in the Palestinian territory of the West Bank.
Israel’s fiscal policy next year will focus on supporting the high-tech industry, Smotrich said, alongside streamlining the public sector and battling unreported income. He did not elaborate on how these would be achieved.
“The announcement on a 4% target deficit next year is important on a declarative level and may eventually allow the Bank of Israel to consider lowering interest rates earlier than expected,” said Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank. “The announcement constitutes an alignment with the Bank of Israel and credit rating agencies, that were critical of the lack of budget discussions so far.”
The Tel Aviv 35 benchmark stock index reacted mutedly to Smotrich’s statement, extending losses to 0.6% as of 3:19 pm Tel Aviv. The shekel fell a second day, weakening 0.9% to 3.68 per dollar.
