2025 state budget to increase defense spending, cut social services and education

Prime Minister Benjamin Netanyahu’s cabinet convened on Thursday to discuss the 2025 state budget, which significantly increases defense spending while cutting healthcare, education and social services.

Despite objections to some of its provisions, the budget, which clocks in at 289 pages long with all its appendices, was expected to be approved by ministers on Thursday night or Friday morning. The government has until the end of March to get it through the Knesset. It includes a massive increase to the Defense Ministry’s budget, which will clock in at NIS 102 billion ($27.2 billion) — although it could potentially rise to up to NIS 150 billion ($40.1 billion) pending talks between Defense Ministry and Finance Ministry officials, Calcalist reported.

Addressing the cabinet on Thursday afternoon, Netanyahu linked the war effort to the health of the economy, stating that “we cannot have a strong army if we have no way to finance it… but the economy also depends on security. If there is an ability to damage our cities, our industry, then obviously our economic capacity would be affected.”

Netanyahu warned that while the security forces will be strengthened by the new budget, there will be cuts elsewhere.

“If you give to one place, you unfortunately have to take from another place,” he said. “There are ways to do this.”

Speaking after Netanyahu, Finance Minister Bezalel Smotrich admitted there are sacrifices in the budget.

“The economic effort is an inseparable part of the war effort,” said the far-right politician. “We are all together in unity… You will see that the costs are spread over everyone equally. No one feels that their world has collapsed on them.”

Once the war is won, there will be “fantastic returns” for the economy, he added.

The state budget proposal presented to the government allocates NIS 605 billion ($163 billion) for 2025, which is about NIS 18 billion ($4.8 billion) more than this year and NIS 61 billion ($16.3 billion) higher compared to the original 2024 budget before it was revised due to war costs.

To finance the war, which is estimated to cost NIS 250 billion ($66.8 billion), the Finance Ministry is proposing steep spending cuts as well as tax increases to fill a fiscal hole of NIS 40 billion ($10.7 billion) in 2025. The measures include a freeze in tax rates, welfare benefits, and public sector wages.

As a result, Israelis will effectively pay more taxes and some government allowances will be trimmed. The measures will freeze the benefits paid to the elderly, people with disabilities, Holocaust survivors, and families of fallen soldiers, meaning that they won’t be adjusted to inflation changes though consumer prices are expected to rise.

In a statement on Thursday afternoon, the Defense Ministry argued that these cuts would harm wounded soldiers and the families of the fallen.

In a scathing public critique, the ministry said that it opposed “any violation of the rights of the IDF wounded and members of the bereaved families, certainly in a time of war and in a year when, unfortunately, the circle of those affected has painfully expanded.”

Eli Ben-Shem, the chairman of the Yad Labanim organization representing bereaved families, also wrote to Netanyahu and Smotrich to protest the move, saying that his organization was “dumbfounded and shocked by the government’s decision to freeze the benefits of the bereaved families,” Ynet reported.

Asked about the budget, Likud lawmaker Boaz Bismuth said that there would have to be “very serious discussions” but that it was “clear” that “all those who contributed to security and paid the price on October 7 need to be rewarded.”

The government set a budget deficit ceiling of 4% of gross domestic product for 2025, down from the annual target of 6.6% of GDP set for the end of 2024. This year’s budget deficit target had to be raised from a planned 2.25%, due to higher defense and civilian spending to fund the year-long war with Hamas.

The Treasury also proposes raising income taxes for earners in Israel’s lowest tax bracket by merging it with the next bracket up. The step would mean those paying the minimum rate of 10% would be taxed according to the 14% income bracket going forward.

Among other proposals, is to freeze income tax brackets and not revise them to inflation, as well as a freeze of the minimum wage.

Under the changes, interest and profits accumulated under Israel’s only short-term, tax-free savings plan — a so-called “advanced study” fund known in Hebrew as keren hishtalmut — would be taxed, and the state would also be able to skim a bigger take from deposits to pension funds.

According to the Finance Ministry proposal, the tax exemption rate on taxable pensions, which was planned to be raised, will remain at its current rate in 2025 and beyond.

In addition, the Finance Ministry plans to cut hundreds of millions of shekels from government ministries and services, including health, education and welfare.

It plans to cut NIS 133 million ($35.5 million) from the education and higher education budget in 2025 and NIS 400 million ($106.9 million) from 2026.

The Health Ministry’s spending budget is poised to be trimmed by NIS 275 million ($73.5 million) in 2025. It includes a reduction of NIS 35 million ($9.4 million) from the budget allocated to train medical staff in the nursing field, NIS 180 million ($48.1 million) from the operation of the health ministry’s headquarters, and NIS 25 million ($6.7 million) to support IVF units.

The Welfare Ministry budget is proposed to be reduced by NIS 100 million ($26.7 million) in 2025 as a one-off measure.

From 2025 onward, the Finance Ministry is seeking to reduce 15%, or NIS 9 million ($2.4 million), of the budget of the Immigration and Absorption Ministry that is allocated for the support of authorities and organizations that help with absorption.

During the discussions on the new state budget, the heads of the local authorities of the towns in the Gaza Envelope learned that 7%, or more than NIS 1 billion ($267 million) of the budget of the Tekuma Authority, tasked with rehabilitating the Gaza border communities, will be cut, according to a report by the Kan public broadcaster.

Thursday’s cabinet discussion went ahead despite earlier threats from the ultra-Orthodox United Torah Judaism party to derail the government budget talks until after the passage of a law maintaining the widespread exemption of Haredi yeshiva students from military service.

Failure to pass the budget by March 31 would result in the automatic dissolution of the government and early elections.

On Monday afternoon, UTJ appeared to backtrack, at least temporarily, instead launching a push on the issue of daycare subsidies for ultra-Orthodox children.

Addressing reporters ahead of his Religious Zionism party’s weekly faction meeting in the Knesset on Monday, Smotrich said that such statements “harm the State of Israel and the IDF’s ability to win the war, and harm the Israeli economy” and that he would “not agree to any political rejection or any ultimatum in this matter.”

“Anybody opposing the budget “will pay a price and bear full responsibility,” he said.

In a video statement on Thursday, National Unity chairman Benny Gantz accused the government of seeking to pass a politicized budget during wartime, insisting that it close unnecessary ministries and stop engaging in “political business as usual.”

“After a year of war, the time has come to move from a sectoral budget, whose purpose is to protect the government, to a responsible budget that will protect the country, both in terms of security and economically,” Gantz, a former member of Netanyahu’s war cabinet, declared in a video message.

Calls for politicians to set a “personal example” by “closing unnecessary government ministries, and stopping the flow of coalition funds,” Gantz said that it was “impossible to mobilize the citizens of Israel when in the government it is political business as usual.”

The Finance Ministry wants to shut five government ministries considered to be superfluous, while the VAT is expected to rise from 17% to 18% in 2025.

“We are in a situation that is not simple, both because of the war and the incorrect management of the government that led to our credit rating being lowered five times,” Yesh Atid MK Vladimir Beliak, who is leading his party’s opposition to the budget, told The Times of Israel.

“So there is a need to cut but this budget has cuts in education, health, welfare [paired with] increases in taxes such as VAT and cuts in stipends that harms the weakest [members of society],” he charged. “What isn’t in this budget is the closure of superfluous ministries. And it seems like there won’t be any cuts to coalition funds — and in this situation where the government will not cut itself, I don’t think it has the right to raise taxes on citizens.”

Lazar Berman contributed to this report.