For first time in 35 years, Israel posts budget surplus driven by higher tax revenue

Finance Ministry says last 12 months saw ‘exceptionally high increase in state revenues’ and ‘impressive recovery’ by economy from pandemic crisis

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

New Finance Minister Bezalel Smotrich, left, shakes hands with outgoing minister Avigdor Liberman at a handover ceremony at the Finance Ministry in Jerusalem, January 1, 2023. (Yonatan Sindel/FLASH90)
New Finance Minister Bezalel Smotrich, left, shakes hands with outgoing minister Avigdor Liberman at a handover ceremony at the Finance Ministry in Jerusalem, January 1, 2023. (Yonatan Sindel/FLASH90)

Israel posted a budget surplus of NIS 9.8 billion ($2.85 billion) in 2022, or 0.6% of gross domestic product, fueled by a 14% rise in tax revenue, the country’s Finance Ministry said on Wednesday.

In 2022, the government’s revenues rose 4.8% to NIS 468.5 billion and exceeded total expenditure of NIS 458.8 billion, creating a surplus for the first time since 1987, the ministry said. The Finance Ministry had set a budget deficit target of 3.9% for 2022. The Bank of Israel earlier this month still expected a budget deficit of 0.3% of GDP.

“2022 was characterized by an exceptionally high increase in state revenues, adding to the exceptional growth in 2021, following an impressive recovery of the economy from the [coronavirus] crisis,” the ministry said in its report.

Israel posted deficits of 4.4% of GDP in 2021 and 11.3% in 2020 as the government introduced a NIS 196.3 billion multi-year economic aid spending plan to help the economy deal with the coronavirus pandemic. To date, 92% of the 2020-2022 aid plan has already been spent, the ministry said. In December, Israel posted a budget deficit of NIS 18.7 billion.

With his ministry soon to be preparing its 2023-2024 budget proposal, newly appointed Finance Minister Bezalel Smotrich said this week that it will focus on driving growth and will aim to provide a lot of relief.

“We are facing a difficult period, but I see it as an opportunity to fortify the State of Israel as a stable, strong and responsible market,” Smotrich said at a government conference on Tuesday. “Populist moves to exceed the budget ceiling could send us all into a spin and harm Israel.”

Finance Minister Bezalel Smotrich holds a press conference with bereaved families at the Finance Ministry in Jerusalem, January 8, 2023. (Yonatan Sindel/Flash90)

Smotrich, head of the far-right Religious Zionism party, emphasized the importance of coordinating fiscal policy with the monetary policy of the Bank of Israel.

Smotrich assumed responsibility over the state’s coffers as the economy is set to slow down significantly this year and the cost of living on the rise, led by housing and energy prices. The Bank of Israel this month lowered its 2023 growth forecast to 2.8%, from 3% in October. In 2024, the economy is expected to grow at annual rate of 3.5%.

In 2022, the economy is projected to have grown at a rate of 6.3%, following its even faster expansion of 8.1% in 2021, the year of recovery from the COVID-19 pandemic.

As the economic adviser to the government, Bank of Israel governor Amir Yaron warned the new incoming government about the potential risk of exuberant budget demands made by its coalition partners. The deals signed with far-right and Haredi partners are slated to increase welfare payouts for the ultra-Orthodox, whose employment rate is low.

“It is important that the new government acts with the necessary responsibility with regard to fiscal policy, in particular regarding new expenditures that are not geared towards promoting sustainable growth,” Yaron cautioned.

According to the central bank’s research department, the tax burden in 2023–24 will decline relative to 2022, and will be similar to that of 2021.

“On the expenditure side, our assessment is that the government programs derived from the coalition agreements and the wage agreements that will be signed during 2023 will sharply increase public expenditure during the forecast period,” the Bank of Israel economists assessed.

In 2023, the Bank of Israel expects the budget deficit to be at least 1.8% of GDP, rising to 2.1% of GDP in 2024. Similarly, Bank Hapoalim forecasts a budget deficit of 1.8% in 2023 assuming that the coalition agreements will be partially implemented.

“The expected increase in government spending (even if only part of the coalition agreements are realized), coupled with the expected moderation in the growth of the local economy in 2023, the sharp decline in the activity of the real estate and hi-tech industries, and the expected moderation in private consumption, are expected to lead to an increase in the budget deficit in the coming year,” said Bank Hapoalim chief strategist Modi Shafrir.


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