Smotrich presents 2025 budget plan, saying war is costing economy as much as NIS 250b
Meeting the deficit target of 4% set for 2025 will require measures including freezing public sector pay, but no tax hikes, finance minister says
Sharon Wrobel is a tech reporter for The Times of Israel.
Finance Minister Bezalel Smotrich on Tuesday presented an initial state budget framework for 2025 based on a deficit target of up to 4 percent of gross domestic product, which will necessitate NIS 35 billion ($9.5 billion) in spending adjustments to finance the costs of the ongoing war.
“We are in the longest and most expensive war in Israel’s history with about NIS 200 billion to NIS 250 billion ($54 billion to $68 billion) in direct costs,” said Smotrich at a press conference in Jerusalem.
“This war began with a huge crisis between the state and its citizens and we had to rebuild trust,” he said.
“The decisions we made for an expansionary economic policy during the war were the right ones, which kept the society and the national resilience alive, and kept the economy going as well.”
The Finance Ministry’s deficit ceiling set for 2025 is in line with the Bank of Israel’s recommendation. For this year, the government had to raise the 2024 budget deficit target to 6.6% of GDP, from a planned 2.25%, due to higher defense and civilian spending as a result of the war with Hamas. In July, the fiscal deficit already climbed above the target to 8.1%. Israel posted a budget deficit of 4.2% in 2023.
“As of now, we are still committed to meeting the deficit target for 2024 as we expect the deficit to be on a downward slope in the last quarter of the year,” Smotrich said.
To meet the budget deficit target set for 2025, Smotrich cited several proposals for spending and tax measures to deal with the needed budgetary adjustments of NIS 35 billion but did not provide details.
“I don’t think that at a time of war it is right to raise taxes such as corporate or income taxes,” said Smotrich. “Instead, the measures we are proposing include a freeze on planned tax changes and efficiency measures in government ministries, as well as a complete freeze on the salaries of ministers, Knesset members, and senior officials.”
Among the measures cited by Smotrich is the merging of the two lowest income tax brackets of 10% and 14%. The step would affect the low-earning working population, which currently pays a minimum rate of 10% and would be taxed according to the 14% income bracket. Another measure that is being proposed is a freeze on public sector pay.
To generate revenues, the Finance Ministry is looking into taxing “trapped profits,” which are gains earned by corporates and multinationals that are not distributed as dividends to shareholders but invested into business development, infrastructure, and research and development centers. Until now trapped profits were tax-exempt to encourage investment in Israel.
Smotrich said that he is planning to present the draft 2025 budget framework to Prime Minister Benjamin Netanyahu on Thursday, and is committed to passing it by the end of the year.
“Smotrich’s policy goes against any economic logic: Israel should choose the opposite policy of investments instead of cuts,” said the Arlozorov Forum, an independent research institute that is involved in shaping socioeconomic policy in Israel. “The Treasury’s proposal is expected to seriously damage almost all layers of the population and widen the socioeconomic gaps.”
In recent weeks discussions between Smotrich and Finance Ministry officials on the 2025 state finances have stalled and planned measures were not advanced jointly with the government. It is expected that Israel’s right-wing coalition government will be bogged down in rifts over the approval of politically tough spending cuts and tax changes necessary to deal with the fiscal hole in 2025.
However, faced with credit ratings downgrades and a widening deficit amid ballooning military and civilian spending, and with the war against Hamas in Gaza soon to enter its 12th month, the government has come under increased pressure to maintain fiscal responsibility and credibility.
This was spotlighted by Bank of Israel Governor Amir Yaron, who urged Netanyahu to make progress on the 2025 budget plan, warning that fiscal discipline and budgetary adjustments were “critical to preserving the stability of the economy and strengthening the reputation of the Israeli economy” during the war period.
Fitch in August downgraded Israel’s credit rating, saying it expects the “conflict in Gaza could last well into 2025” and weigh on the country’s hard-hit finances. The rating agency kept a negative outlook on the economy, leaving room open for additional downgrades and raising concern about the government’s willingness to take the difficult but necessary steps to bring the fiscal deficit under control by raising taxes and curtailing non-war related spending. It is the third global credit agency to cut Israel’s credit rating this year, following S&P and Moody’s.
