Israel's Finance Ministry Conceals 19 Billion Shekel Fiscal Buffer Amid War Spending Surge

Israel's Finance Ministry officials are cautiously optimistic as the government's deficit has stabilized at 3.3% of GDP, the lowest since November 2023, despite ongoing multi-front wars. Data from the first seven months of the year show a deficit of 11.5 billion shekels, a 69% decrease from 37.2 billion shekels during the same period last year. This improvement is largely attributed to a significant rise in tax revenues, which increased by 38.3 billion shekels, outpacing the 12.6 billion shekel rise in government spending.

The government’s monthly expenditures remain high, with July seeing a record 60 billion shekels spent, yet the monthly deficit was similar to last year at 4.8 billion shekels. Direct taxes surged by 17.7% to 212.8 billion shekels, and indirect taxes rose by 10% to 130.7 billion shekels. Defense spending increased by 12.6% to 108.2 billion shekels, while civilian ministries saw a slight nominal decrease. The defense budget, initially set at 112 billion shekels, was raised to 158 billion shekels, with an additional 15 billion shekels contingent on actual reserve troop deployment, reflecting the ongoing war demands.

A key factor behind the unexpected revenue growth is the taxation of retained earnings among self-employed individuals, which has expanded the tax base and increased income tax collections. This structural change in tax collection has led to a debate among economists about whether the revenue surge is temporary or permanent. The Finance Ministry’s chief economist has revised revenue forecasts upward by 7 billion shekels for 2027, indicating a possible structural shift.

Despite the apparent fiscal cushion of approximately 19 billion shekels, tensions exist between the Finance Ministry and the Bank of Israel. The central bank warns that defense spending will likely remain high at 6% to 7% of GDP, necessitating fiscal adjustments such as spending cuts or tax increases. The Finance Ministry counters that raising taxes to close a shrinking deficit could unnecessarily hinder economic growth. Officials acknowledge the fiscal buffer but caution that political and military pressures may dictate its use rather than structured budgetary decisions.

The ongoing war and its financial demands continue to complicate Israel’s fiscal outlook, with the government running a significant deficit expected to grow if the conflict persists. The key question remains whether the fiscal buffer will be managed prudently or consumed by urgent spending demands from various ministries, especially defense.