Smotrich pushes agenda for two-day ‘marathon discussions’ to draft 2025 budget

Finance minister orders treasury to engage next week in swift budget talks, which typically take two months, to help put the war-battered economy on a path to growth

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

File - Finance Minister Bezalel Smotrich in Jerusalem, April 21, 2024. (Chaim Goldberg/Flash90)
File - Finance Minister Bezalel Smotrich in Jerusalem, April 21, 2024. (Chaim Goldberg/Flash90)

Finance Minister Bezalel Smotrich on Sunday demanded two days of “marathon talks” be held next week to help draft the 2025 budget outline, with the country’s finances getting dented by the costs of war with the Hamas terror group.

In a letter addressed to the treasury’s budget head Yogev Gradus, Smotrich requested that intensive discussions to build the 2025 budget framework be held on June 18 and 19, instead of taking two months as in previous years. He asked that all senior Finance Ministry officials, as well as Bank of Israel Governor Amir Yaron, participate in the discussions, which he said were intended to help put the war-battered economy on a trajectory of growth.

Smotrich emphasized the importance of fiscal responsibility and the need for a swift procedure to draft the 2025 budget framework to create certainty and preserve investor confidence in the economy.

War in Gaza erupted with Hamas’s October 7 massacre, which saw some 3,000 terrorists burst across the border into Israel, killing some 1,200 people and seizing 251 hostages amid acts of brutality and sexual assault. The fighting is slated to incur NIS 253 billion ($67 billion) in defense outlays, expenditures for civilian needs, and lost tax income between the years 2023 and 2025, according to Bank of Israel estimates.

“The ongoing war and its effect on the economy require fiscal discipline and full transparency regarding data, the processes of policy formation and decision-making,” Smotrich said. “The market expects from us leadership and certainty to respond to the challenges the economy faces and to invest in growth mechanisms.”

The demand for oversight and control comes as Smotrich has been harshly criticized for failing to adjust fiscal priorities to address wartime needs and support the economy’s recovery. Despite making moderate spending cuts in the 2024 revised budget, Israel’s right-wing coalition has left in place billions of shekels in discretionary funds made available to political allies under deals reached in coalition talks over a year ago.

Governor of the Bank of Israel Amir Yaron speaks at the Maariv economic conference in Tel Aviv, March 26, 2024. (Avshalom Sassoni/Flash90)

With the budget deficit already at 7.2 percent of GDP in May, above a 6.6% target for 2024, and rating agencies cutting Israel’s credit rating, “significant” fiscal adjustments on the spending side and tax increases on the revenue side are necessary to prevent the deficit from spiraling out of control, the Bank of Israel and senior economists have been warning.

Although Smotrich cited in the letter the need for reforms and war rehabilitation  in tech, real estate, and infrastructure as efforts to support growth, he did not provide any details about prioritization of measures, or the expected need to raise taxes.

Meanwhile, Yaron has in recent weeks urged the government to make the right balances and make fiscal cuts as the security budget is expected to grow permanently and will have a macroeconomic impact. The governor has indicated that a rise in taxation needs to be considered to fund the expected increase in the defense budget, help reduce the structural deficit, and lower the country’s debt-to-GDP ratio.

To partially offset the increase in expenditure due to war costs, the government as part of the amended 2014 budget in March approved a hike in the value-added tax (VAT) – from the current 17% to 18% — which is planned for 2025.

“While there were considerable adjustments made as part of the amendment to the 2024 budget, particularly the correct decision to raise the VAT rate, many of the other measures did not reflect structural and continuing adjustments, as we pointed out then, which makes it necessary to include additional measures in the coming budgets,” said Yaron at a cabinet meeting on Sunday.

“These adjustments must be made in an informed and measured manner, while avoiding harm to growth engines that are important to the economy such as investment in high-quality education for all population sectors and development of high-quality infrastructure, with an emphasis on public transit.

“These investments have the potential to increase productivity, raise the level of human capital in the economy, and contribute to sustainable long-term growth,” he added.

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