Israel's Government Deficit Shrinks Significantly Due to Tax Revenue Surge

Israel's government deficit has seen a substantial decrease, reaching 3.2% of the GDP over the last 12 months, down from 3.3% in July and well below the annual target of 4.9%. This improvement is primarily driven by a sharp increase in state revenues, rather than reduced spending. Government income from the start of the year totaled 410.1 billion shekels, a rise of over 42 billion shekels compared to the same period last year, with tax revenues climbing 13.9%. Direct taxes, including income and corporate taxes, surged by 16.3%, while indirect taxes like VAT increased by 10.5%.

In contrast, government expenditures rose by only about 14.8 billion shekels year-to-date. This means revenue growth was nearly three times higher than the increase in spending, significantly contributing to the deficit reduction. However, signs of a slowdown in tax collection growth are emerging, with the cumulative growth rate dropping from 14.5% in July to 13.9% in August.

Defense spending has increased significantly, accounting for 123 billion shekels so far this year, a 10.9% rise against the planned 2.7% increase. The defense system has already utilized 72.4% of its annual budget with four months remaining. Conversely, civilian ministries spent 255.5 billion shekels, a 0.1% decrease from last year, and have used 59.2% of their budget. Economic ministries saw a 6.1% spending drop, and social ministries a 0.9% decrease.

While overall spending growth has been moderate, there's an accelerating trend in recent months, with August expenditures up 3.2% year-on-year. The Ministry of Finance anticipates this spending pace will continue to rise. If tax revenue growth continues to moderate, the rapid deficit reduction could stall. High government spending is also typical towards the end of the year, particularly in December.

Despite the deficit improvement, the government has continued to raise substantial debt. Net domestic debt issuance reached 45.7 billion shekels, with an additional 15.9 billion shekels raised abroad. These borrowings, along with 4.6 billion shekels from land privatization, have resulted in funding sources totaling approximately 66 billion shekels, exceeding current deficit financing needs and bolstering the government's cash reserves.