Israel's Budget Deficit Stabilizes, Driven by External Factors Not Policy
Translated & summarized from Calcalist by baba
Israel's budget deficit has stabilized around 3.2%-3.3% of GDP, showing improvement since the war's start but not due to fiscal policy. Revenue increases and controlled spending are contributing factors, though defense spending has risen significantly. The deficit is expected to be lower than the target this year. However, the deficit's future reduction in 2027 is anticipated to stem from a restrictive continuing budget due to political delays, rather than intentional economic strategy.
The story in 5 lines · by baba
- Israel's budget deficit has stabilized around 3.2%-3.3% of GDP, showing improvement since the war's start.
- The deficit's recent slight worsening in October was mainly due to a decline in government revenues.
- Defense spending increased by 9.9% this year, significantly outpacing civilian ministry spending.
- The deficit is expected to be lower than the target for 2024, assuming no new war.
- A projected deficit reduction in 2027 is expected to result from a continuing budget due to political delays.
Israel's budget deficit has shown a significant improvement since the outbreak of the war, mirroring a "swoosh" pattern. It surged from 2.6% of GDP in October 2023 to 8.4% in September 2024, before gradually declining to 3.2%. However, the deficit has stagnated between 3.2% and 3.3% since June. In October alone, the deficit reached 18.3 billion shekels, a more than 20% increase from 15.2 billion shekels in October of the previous year. This slight deterioration in recent months is primarily due to lower revenues, which have decreased by approximately 0.15 percentage points of GDP over the last 12 months, while expenditures have remained relatively stable. Despite these challenges, the deficit is not expected to exceed its target for this year or early next year.
The government is projected to end the year significantly below the target deficit of 4.9% of GDP, or 111.2 billion shekels, assuming no new war breaks out. Tax revenues have shown resilience, increasing by 4.1% in real terms in October. However, this relatively low deficit does not reflect fiscal restraint. The overall budget increased by 23.6 billion shekels to 721.8 billion shekels during the year, with a substantial rise in defense spending (9.9%) compared to civilian ministries (1.4%). Official reports may present a more conservative picture than reality due to accounting methods and the comparison of actual spending to the original budget.
Further analysis reveals that revenue figures are less impressive than initially presented. Discrepancies exist between the Ministry of Finance's nominal growth figures and the Tax Authority's real growth figures. Additionally, a 5.5 billion shekel loan from the National Insurance Institute is recorded as income, and a change in the allocation to the compensation fund affects the figures. The deficit calculation used by the Ministry of Finance also differs from the broader government deficit calculated by the Central Bureau of Statistics, which is used by international bodies like the IMF and credit rating agencies.
The deficit, even at 3.3% of GDP, follows three years of exceptional deficits that have increased the debt-to-GDP ratio from around 60% before the war to an estimated 68% by the end of 2025. Looking ahead to 2027, the deficit is expected to decrease significantly due to political timing. With elections held and a new budget not yet prepared, the economy will likely operate under a continuing budget. This provisional budget, based on the 2026 spending ceiling, is estimated at approximately 633 billion shekels, excluding one-off expenses, leading to a much tighter monthly spending limit. This fiscal restraint is not a result of deliberate economic policy but rather a consequence of political uncertainty and the absence of a functioning government to approve a new budget, potentially delaying approval until late May or even later if elections are repeated.
