Fiscal deficit climbs to 8.5% as state continues to shell out for war effort

Deficit climbs for sixth month above 2024 government budget ceiling of 6.6%, as spending on the war with Hamas and intense fighting with Hezbollah tops NIS 103 billion

Sharon Wrobel is a tech reporter for The Times of Israel.

Illustrative: New Israeli shekel bills, September 24, 2023. (Hadar Youavian/Flash90)
Illustrative: New Israeli shekel bills, September 24, 2023. (Hadar Youavian/Flash90)

Higher military and civilian spending to fund the yearlong war with Hamas and intensified fighting with Hezbollah have pushed Israel’s budget deficit in September to 8.5 percent of national output, preliminary figures released by the Finance Ministry on Thursday showed.

It marks the sixth month the deficit is above the government’s annual target of 6.6% of gross domestic product set for the end of 2024. Israel posted a budget deficit of 4.2% of GDP in 2023 and is planning to lower the deficit to 4% in 2025.

The deficit widened from 8.3% of GDP in August, 8.1% in July, and 7.6% in June, amid growing military and civilian spending on the ongoing war which broke out after Hamas-led forces on October 7 invaded Israeli southern communities, killing some 1,200 people, mostly civilians, and taking 251 as hostages into the Gaza Strip.

Since October 8, Hezbollah terror forces have attacked Israeli communities and military posts along the northern border on a near-daily basis, with the group saying it is doing so to support Gaza amid the war there. The fighting in the north steadily escalated over the months, boiling over last month when Israel began a major offensive against the terror group by killing nearly its entire top leadership and launching a ground operation in southern Lebanon.

Despite the extra funds needed to finance the fighting on multiple fronts, the Finance Ministry reiterated in recent weeks that it expects the deficit to reverse to a downward trend from October and converge to the deficit target of 6.6% of GDP by the end of 2024.

Speaking at a Knesset Finance Committee meeting last month, Finance Minister Bezalel Smotrich echoed the commitment to meet the deficit ceiling and was even willing to bet a bottle of whiskey that it won’t be breached.

But on Wednesday Bank of Israel Governor Amir Yaron said that the central bank raised its forecast for the deficit to 7.2% of GDP from 6.6%, due to “growth in the costs of the war and the flows of special US aid that were partly shifted to 2025 and onward.”

A man examines his damaged apartment that was hit by a Hezbollah rocket fired from Lebanon, in Kiryat Yam, October 8, 2024. (AP Photo/Ariel Schalit)

“Although the deficit in September has increased again, the rate of growth is moderating, as the revenue side is recovering every month, since the reversal of the downward trend four months ago in state income,” said Mizrahi Tefahot Bank chief markets strategist Ronen Menachem. “The budget deficit target for 2025 is challenging and the uncertainty surrounding the forecasts on the revenue and expenditure side is high.

“However, if the trends continue, in the last quarter of the year it is likely that the starting point will be more favorable,” Menachem said.

The September figures showed that government expenditure increased to NIS 51 billion ($13.5 billion), taking spending since the start of the year to about NIS 450 billion, a cumulative increase of 31% compared with the same period in 2023. War costs since the outbreak of the fighting in October last year ballooned to NIS 103.4 billion.

State revenues amounted to NIS 42.2 billion in September, up from the NIS 37.4 billion generated in the previous month. Revenue from the beginning of the year stood at about NIS 357.3 billion compared to NIS 339.2 billion in the corresponding period last year, marking an increase of about 5.4%. Income from tax revenue rose by 9.6% in September year-on-year and is up 2.6% since the start of 2024, according to figures released by the Israel Tax Authority.

“There has been a consistent improvement on the revenue side, in particular in revenues from indirect taxes,” said Menachem. “This indirectly indicates continued growth in the activity of the business sector and the economy and for now does not raise fear of a possible moderation.”

Net income from real estate taxation, which soared 46% to NIS 1.4 billion in September versus the same month in 2023, is still down 5% since the start of the year. The collection from real estate purchase taxes jumped 34% in September year-on-year, while income from property betterment taxes leaped 52%.

Most Popular
read more: