Israel’s 2025 Budget Report Reveals Lower-than-Expected Deficit
Overview of the Fiscal Report
The Israeli Ministry of Finance released its budget execution report for 2025, revealing a fiscal deficit of 4.7% of GDP, significantly lower than the forecasted 5.2%. This figure represents a decrease from the previous year’s deficit of 6.8%. The total deficit amounts to approximately 98.6 billion shekels, although it is important to note that this is an initial estimate. A comprehensive report on state revenues and expenditures will be published in the coming months.
Increase in Tax Revenues
Key to the reduction in the deficit was a notable rise in tax revenues, which reached around 520 billion shekels this year, up from 455 billion shekels in 2024-an increase of approximately 64 billion shekels. Half of this increase can be attributed to tax hikes implemented during the year. Direct tax revenues alstart accounted for around 300 billion shekels.
The report highlights that additional revenues of approximately 20.9 billion shekels stemmed from legislative changes that affected tax collection in 2025. Noteworthy tax reforms included a new 2% surcharge on capital income-covering dividends, rental income, and capital gains-as well as reforms concerning undistributed profits taxation. These changes reportedly led to a significant uptick in dividend distributions beyond normal monthly averages.
Additionally, the rise in the Value Added Tax (VAT) from 17% to 18% is believed to have prompted increased consumption and boosted imports, particularly of vehicles, while also affecting other import duties.
Government Expenditure Trends
Government expenditures rose by 4.8% between 2024 and 2025, driven in part by an additional 31 billion shekels allocated for military expenses included in the supplementary budget passed in September. Tax revenues surged by 13.8% compared to the previous year, surpassing initial fiscal projections. Total revenues amounted to 551.9 billion shekels, compared to 484.9 billion shekels in the prior year.
Military expenditures for 2025 are estimated at 78 billion shekels, encompassing both civilian and military costs. The cumulative direct cost of military operations since their commencement is approximated at 199 billion shekels, with about 164 billion directed toward military expenses.
Implications for National Debt
The implications of a 4.7% deficit reflect the state of Israel’s national debt relative to GDP. This deficit equates to 98.6 billion shekels, a reduction from the 135 billion shekels deficit recorded in 2024. Funding for the deficit has been sourced through local debt issuance amounting to 64.4 billion shekels and net foreign debt fundraising of 14.7 billion shekels. Additionally, privatization proceeds, primarily from land sales, totaled 12.7 billion shekels.
Future Outlook and Credit Rating Considerations
The Ministry of Finance is positistartd to leverage these comparatively positive figures in its efforts to persuade credit rating agencies to improve Israel’s credit outlook. However, there is an acknowledgment that the fiscal realities, particularly with anticipated high expenditures in the upcoming year, pose significant challenges.
Initially, the proposed budget aimed for a deficit of 3.2% of GDP, which was later adjusted to 3.9% post-approval in the government. This budgetary deficit does not enhance Israel’s capacity to lower its current debt-to-GDP ratio, already exceeding 68% compared to about 60% before the military conflict.
The report emphasizes the importance of addressing structural issues within the Ministry of Finance while navigating the challenges posed by ongoing expenditures.
In summary, while the 2025 financial report presents encouraging developments in tax revenues and spending management, the overarching fiscal landscape remains complex and requires careful navigation for sustainable economic health in the future.