The Israeli government continues its meeting – today, Thursday – to vote on the country’s long-awaited 2025 budget, which will reduce spending and increase taxes to finance Israel’s wars in the Gaza Strip and Lebanon.
The wars in Gaza and Lebanon cost Israel’s coffers tens of billions of shekels in spending on defense, equipment and manpower, after hundreds of thousands were called into reserve service and compensation was paid to those affected.
“Our security also depends on the economy. We cannot have a strong army without a way to finance it,” Prime Minister Benjamin Netanyahu said at the beginning of the government meeting before the budget vote, which may continue into the night.
He added, “There is no economy without restrictions. If you spend on one thing, you will unfortunately have to deduct from something else.”
Hard hit
The Israeli economy received a strong blow after the Al-Aqsa Flood operation launched by the Palestinian resistance led by the Islamic Resistance Movement (Hamas) on the Gaza Strip on October 7, 2023. Since then, Israel has faced several economic repercussions, the most prominent of which are:
- The economy did not achieve any significant growth
- Supply problems have led to increased inflation and higher costs of living for Israelis, whose morale has already been affected by more than a year of war.
- The three major credit rating agencies lowered Israel’s credit rating this year due to the two wars, which led to higher financing costs and the central bank being forced to hold interest rates at high rates due to inflation reaching 3%.
Austerity measures
The 2025 budget imposes austerity measures with the aim of reducing the fiscal deficit from 8.5% of GDP currently, which is higher than the 2024 target of 6.6%, to 4% of GDP through a proposal to reduce spending and increase taxes, achieving about 40 billion shekels (10.8 billion shekels). billions of dollars).
Among the tax increases, the value-added tax will rise in 2025 to 18% from 17%.
Israeli Finance Minister Bezalel Smotrich said that the army’s budget in 2025 will not be open, even though its spending will reach 102 billion shekels ($27.5 billion) next year.
Total budget spending will reach 744 billion shekels ($200 billion) in 2025, including 161 billion shekels for debt service.
Economic growth is expected to reach only 0.4% in 2024 and 4.3% in 2025.
If the Council of Ministers approves the draft budget, it will be referred to Parliament for an initial vote. Smotrich expects Parliament to finally approve the budget next January.
If the budget is not approved by March 31, 2025, new elections must be held.
IMF forecasts
It is noteworthy that the International Monetary Fund a few days ago reduced its forecast for the growth of Israel’s economy to 0.7% during the current year from 1.6% expected last April, under pressure from military expenditures due to its wars in Gaza and Lebanon.
The Fund expects Israel to use higher government spending in the near term to support the economy and cover the military costs of the war, according to the Fund’s World Economic Outlook report.
The Fund stated that its forecasts are subject to a state of increasing uncertainty due to the war, and may therefore be revised. The Fund expected Israel’s economy to grow by 2.7% next year and 3.4% in 2029, according to what was stated in the Global Growth Prospects report issued this month.
