Israel's fiscal deficit narrows for fifth straight month

Finance Minister Bezalel Smotrich credit: GPO Yossi Zamir
Finance Minister Bezalel Smotrich credit: GPO Yossi Zamir

Record tax revenues and lower government spending due to the ceasefire and restrictions until the 2025 budget is passed have improved the fiscal deficit.

Israel's fiscal deficit narrowed in the twelve months to the end of February 2025, for the fifth consecutive month, to 5.3% of GDP, or NIS 107.9 billion, Ministry of Finance accountant general Yali Rothenberg reported today. In the twelve months to the end of January 2025, the fiscal deficit was 5.7%.

The decline in the deficit was measured on both sides of the equation: state revenues and government spending. This was partly expected. Government spending is restricted by the constraints of the rolling budget. As the 2025 budget has not yet been approved by the Knesset, government ministries must adhere to a mechanism that only allows them to spend an average of about NIS 8 billion less each month than they would be able to under the 2025 budget proposal.

The government's slow spending pace is expected to continue at least until the end of the first quarter of 2025. The first quarter also contrasts with the surge in defense spending in the early months of the war. Since the deficit is calculated 12 months back, it should be eroded every month in the coming months on the spending side, if fighting does not resume.

Thus, in the first two months of 2025, there has been a 5.2% decrease in government spending compared with the corresponding period last year. However, if the state budget is indeed passed at the end of the month - the legal deadline for its approval - a significant jump in April-May spending is expected. This is due to the deferred demands in government ministries, where projects and procurements are waiting for money.

Growth trend in revenues

On the state revenues side, the picture is more complex. January 2025 broke an all-time record, with revenue of NIS 63 billion. At that time, it was mainly about advances in transactions and financial measures by the public, seeking to avoid anticipated tax hikes, including the increase in VAT, the higher surtax for the wealthy, and the Trapped Profits Law for corporations. This wave of advances was also felt in February, for example in the collection of VAT on transactions from December.

Even after deducting the accounting jump in revenue at the beginning of the year, a trend of a growth in revenues is still evident. In some segments, revenues in February exceeded not only the corresponding month in 2024 but also in 2023. Corporate tax, for example, saw a handsome increase, attributed, among other things, to bank profits. In industries such as construction and tourism, which have not yet recovered, the figures are still not close to what they were before the war. Still, there is a noticeable increase in state revenues from capital gains tax and purchase tax on apartments.

Overall, in the first two months of 2024, the jump in revenues was 29.7% compared with the corresponding period last year - a figure expected to moderate over time.

Published by Globes, Israel business news - en.globes.co.il - on March 10, 2025.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.

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