Israeli Finance Minister plans 2025 spending cuts to fund Gaza war

Israeli Finance Minister Bezalel Smotrich said on Tuesday the 2025 state budget will feature steep spending cuts as the government tries to balance fiscal responsibility with a need to finance Israel's ongoing war with Hamas in Gaza.

The minister has been under pressure from the Bank of Israel and investors seeking clarity on fiscal policy for next year. The central bank has been calling for spending cuts and tax hikes or other ways to bring in more revenue. But Smotrich has said that during a war it was wrong to raise taxes.

Speaking at a news conference, Smotrich outlined only his main focus points while formulating the budget, which he said would be ready for a cabinet vote in early October and an initial parliamentary vote in mid-November. Full approval by lawmakers would be at the end of December, he said.

"We are in the longest and most expensive war in Israel's history with expenses of 200 to 250 billion shekels ($54-$68 billion)," Smotrich said.

"We are not limiting war spending and we will support the war effort until victory," he said. "Without victory, there will not be security and without security there will no economy."

The war, triggered by Hamas attacks on Israel, has raged since Oct. 7 with little signs of a near-term ceasefire.

To finance the war, Smotrich plans broad spending reductions of 35 billion shekels in 2025, along with a freeze in tax rates, benefits and wages. He sees a budget deficit of 4% of gross domestic product, down from a 6.6% of GDP target in 2024.

The deficit reached 8.1% in July and is expected to grow further in August but Smotrich said it will come back to its target by year end.

Three credit rating agencies lowered Israel's credit rating this year and Smotrich has also been accused of not managing the economy well with scant growth of 1.2% in the second quarter.

Smotrich said the shekel was far stronger than prior to the war, the stock market was doing well and high tech investments have recovered, with the jobless rate at 2.8%.

A rise in inflation to 3.2% was temporary, and mainly due to supply factors stemming from the war, he said.

An economic plan accompanying the budget will include support for the high-tech sector, a streamlining of the public sector, measures to fight tax evasion and a diversification of capital sources.

($1 = 3.6805 shekels)