Israel's Next Government Faces Deepening Deficit and Tax Decisions
Translated & summarized from Globes by baba
Israel's next government faces critical economic decisions, including managing a growing deficit and a significantly increased defense budget. The War Damages Compensation Fund is also depleted, requiring potential adjustments to its funding. Economists are urging fiscal discipline, control over defense spending, and strategic investments in growth engines like education and infrastructure. Potential solutions include tax adjustments, budget cuts, and integrating underrepresented populations into the workforce.
The story in 6 lines · by baba
- Israel's next government must address a widening deficit and a tripled defense budget post-war.
- The War Damages Compensation Fund is depleted, necessitating potential increases in its funding.
- National debt has risen to 68.5% of GDP, requiring fiscal discipline and debt reduction.
- Economists call for controlling defense spending and prioritizing civilian investments in education and infrastructure.
- Potential solutions include tax adjustments, budget cuts, and workforce integration.
- Sanctions against Israel are identified as an existential threat requiring proactive measures.
Israel's upcoming government will confront significant economic challenges, including a widening deficit and the need to address pressing fiscal issues. These range from immediate microeconomic concerns to long-term macroeconomic strategies that will shape the nation's economy for decades. Key among these are the defense budget, which has seen substantial increases since the war began, and the need to foster economic growth engines.
The defense budget has ballooned, with current allocations reaching NIS 143 billion, supplemented by NIS 15 billion from war reserves. Recent government cuts, including NIS 1 billion from a five-year plan for the Arab society and NIS 2.6 billion in across-the-board reductions, are now under review. Defense officials estimate an additional NIS 25 billion shortfall by year-end, with some suggesting this amount has already been spent, exceeding the budget framework. Efforts by Prime Minister Benjamin Netanyahu and ministers Israel Katz and Bezalel Smotrich to pass a budget breach law to add billions for defense in the current and next year are uncertain due to the election results, which saw the transitional government lose its Knesset majority.
Another urgent issue is the depletion of the War Damages Compensation Fund, which is intended to cover damages from combat events. Funded by a portion of real estate purchase taxes, the fund has paid out NIS 37 billion since the war's start until the end of last year, with an additional NIS 5 billion disbursed this year. To replenish it, the government may need to increase the allocation rate from property purchase taxes, which has fluctuated significantly in recent years.
Economists emphasize the need for fiscal discipline to manage the national debt, which rose from 60% of GDP before the war to 68.5% by the end of last year. Experts like former Accountant General Yahli Rotenberg and former Chief Economist Yoel Naveh stress controlling the defense budget, which has tripled since the war's outbreak, and establishing clear priorities for civilian spending in education, infrastructure, and health. They also warn of the existential threat posed by potential sanctions on Israel.
Addressing the economic challenges will likely involve a combination of tax increases, budget cuts, and debt management. Economists suggest raising taxes, particularly on capital rather than labor, cutting sectoral spending and coalition funds, enforcing efficiency in the military and government ministries, and investing in education and infrastructure for long-term growth. Experts also point to the need to integrate the Haredi and Arab populations into the workforce and encourage companies to list on the Tel Aviv Stock Exchange to foster economic maturity.
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