Israel 2025 budget deficit could breach target and hit 5% of GDP, official says

Israel's budget deficit could near 5% of gross domestic product in 2025, above the government's target but below last year's 6.9% and a level that could boost its credit rating after a series of downgrades, a senior finance ministry official said.

The deficit in 2024 was the highest since topping 11% of GDP in 2020 amid a surge in spending and a drop in tax revenue as a result of the COVID pandemic.

Yali Rothenberg, Israel's accountant general, said he expects the deficit this year to be between 4.4% and 4.9% of GDP - versus a target of 4.4% set in the 2025 budget draft, which still needs final parliamentary approval.

Last week, the Bank of Israel projected the deficit this year would be 4.7% of GDP.

"It's very important to stick to the deficit plan. It's very important to pass the budget that reflects a fiscal contraction of two percentage points," Rothenberg told reporters on Monday in a briefing to discuss the 2024 budget data.

"This would be a very important message to capital markets and it would stabilize the debt to GDP ratio and improve the credit rating, which is very important."

All three major credit rating agencies cut Israel's sovereign rating last year due to the heavy cost of funding Israel's wars against Palestinian Islamist group Hamas in Gaza and Hezbollah in Lebanon in the wake of Hamas' attacks on Israel on Oct. 7, 2023.

In a joint statement, Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich said the budget data are "proof of the correctness of the economic policy we are leading, a policy that addresses all the needs of the war on the frontlines and the homefront until victory, while helping to maintain economic stability."

They added that they succeeded in a balance of increasing state revenues and maintaining budgetary restraint, as well as expanding civilian spending.

BUDGET PASSES INITIAL VOTE

Lawmakers narrowly approved the budget in an initial vote but it still needs to pass two more votes to become law.

Until a budget is approved in 2025, the 2024 budget will be divided into 12 parts and 1/12 is allocated each month.

Failure to approve the budget by March 31 would trigger new elections.

War expenses in 2024 were some 100 billion shekels ($27 billion) and total 125 billion since the war began.

Israel's budget deficit was 4.1% of GDP in 2023. It rose as high as 8.5% of GDP in the 12 months ended September 2024 before easing in the fourth quarter on what Rothenberg said was stronger economic activity.

Although spending jumped 20% in 2024 to 621 billion shekels, revenue rose 10.5% to 485 billion, resulting in a deficit of 136 billion shekels.

In December, the deficit was 19.2 billion shekels, while its 6.9% of GDP figure was its lowest since last March and below November's level of 7.7%.

Tax revenue rose 27.6% in December versus December 2023 and was up 7.3% in 2024 as a whole.

($1 = 3.6604 shekels)