Budget deficit narrows amid tax hikes, declining war costs

Israel’s budget deficit narrowed to 5.3 percent of gross domestic product (GDP) in February, from 5.7% in the previous month, after a series of tax hikes came into effect in 2025 while war costs continued to decline, according to preliminary figures released by the Finance Ministry.

In February, state revenues increased 11% to NIS 39.6 billion ($11 billion) from NIS 35.8 billion ($9.9 billion) year-on-year as tax revenues grew. Income from direct taxes rose 12.4% to NIS 23.5 billion ($6.6 billion) versus the same month last year.

Government expenditure in February declined 7.3% to NIS 45.7 billion ($12.6 billion) from NIS 49.3 billion ($13.6 billion) during the same month last year. The ministry attributes the drop to a “continued trend in lower war-related costs and spending.”

On January 1, tax hikes came into effect to boost state income and fill a fiscal gap amid high defense expenses during the 16-month multifront war. Value-added-tax rose from 17% to 18%. VAT is a consumption tax that is collected through the purchase of goods and services, and is levied on most consumer goods and services, except for fresh produce.

In addition, National Insurance payments rose, one day of recuperation payments was deducted from salaried employees, and income tax brackets and tax credit points were frozen.