Treasury said to urge Smotrich to make cuts, hike taxes to raise NIS 30-50 billion

In marathon meetings, officials tell finance minister measures must be taken to curb ballooning deficit spending amid war, send positive message to credit agencies

Finance Minister Bezalel Smotrich attends a Knesset Finance Committee meeting in Jerusalem, on June 10, 2024. (Chaim Goldberg/Flash90)
Finance Minister Bezalel Smotrich attends a Knesset Finance Committee meeting in Jerusalem, on June 10, 2024. (Chaim Goldberg/Flash90)

Treasury officials this week recommended to Finance Minister Bezalel Smotrich that cuts and taxes be imposed next year to raise an extra NIS 30-50 billion ($8-13.4 billion) to fund war costs, a Hebrew media reported said Thursday.

The Channel 12 news report said that during marathon discussions on the 2025 state budget, the officials told Smotrich that Israel needs to send a message to credit rating agencies that it is serious about proper financial oversight, and cannot continue increasing deficit spending, as the ongoing Israel-Hamas war incurs major costs on the country’s finances.

The specific moves reportedly proposed include raising the current VAT tax of 17 percent by two percentage points to 19%; cutting child allowances; freezing public sector wages; halting inflation adjustments to income tax rates to bring in more revenue; curbing tax breaks on workers’ saving funds that are primarily funded by employers; and slicing coalition spending.

Commenting on the meeting, Smotrich said Tuesday that the 2025 budget would be “challenging,” but that “we will succeed in acting in a fiscally responsible way, to respond to all the needs of the war, at the front and at home, until victory, and to put the Israeli economy on a path of accelerated growth.”

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 2023 and 2025, according to Bank of Israel estimates.

With the budget deficit already at 7.2% 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.

Calling for marathon budget talks earlier this month, 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.

But 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.

Sharon Wrobel contributed to this report.

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