Israel Lowers Debt-to-GDP Ratio Following Strong Economic Growth Data

The Israeli Ministry of Finance is set to revise the country's debt-to-GDP ratio downward after recent economic growth data exceeded expectations. The Central Bureau of Statistics reported that Israel's economy grew at an annualized rate of 15.4% in the second quarter of the year, prompting an update to previous growth estimates from last year. Consequently, the official debt-to-GDP ratio, currently at 68.4%, is expected to be adjusted down to 67.9%, marking a positive surprise.

Before the outbreak of war, Israel's debt-to-GDP ratio was approximately 60%, but it surged due to the conflict. Both the International Monetary Fund (IMF) and the Bank of Israel have urged immediate efforts to reduce this ratio despite many Western countries operating with debt levels exceeding 100%. This caution stems from Israel's frequent geopolitical crises, making fiscal buffers essential.

The next government will face the challenge of managing debt reduction alongside rising interest payments, increasing military expenditures, and relatively low civilian spending. The IMF has recommended several tax reforms, including eliminating the lowest tax bracket, reducing various tax benefits, removing VAT exemptions on fruits and vegetables, expanding taxes on single-use items and sugary drinks, and potentially raising VAT further to lower the debt ratio.

Some government officials believe that strong growth and unexpectedly high tax revenues could cover budgetary needs without drastic measures. However, economists warn against relying on uncertain future growth and tax income. Notably, the growth figures are partly influenced by Nvidia, an Israeli-based company whose production and exports occur mainly abroad. Excluding Nvidia's impact, last year's growth would be 2.1% instead of 3.5%.