Treasury Lowers Growth Forecast for 2025, Projects Deficit Around 3% in Coming Years

Revised Economic Growth Forecast

Today, the Ministry of Finance announced a notable downward revision of Israel’s macroeconomic growth forecast for 2025. The growth rate is now projected to be 3.6% of GDP, a reduction of 0.7 percentage points from the previous estimate of 4.3% that was used as a basis for the annual budget. This adjustment is attributed to three primary factors: the prolonged duration of ongoing military conflict, an adverse impact on global trade stemming from the tariff policies of the Trump administration, and updates to statistical data.

Contributing Factors to the Downward Revision

The adjustment in the growth forecast is linked to:

1. Prolonged Military Conflict: The extension of hostilities has led to a projected decrease of 0.3% in GDP.
2. Global Trade Disruption: Changes in global commerce resulting from previous tariff policies are expected to cause a further decline of 0.3% in GDP.
3. Statistical Data Updates: Minor adjustments in statistical estimates account for a 0.1% impact.

Despite the decline in the growth forecast, the Ministry has raised its revenue projection for 2025, increasing it from 517.1 billion shekels to 538.6 billion shekels. This increase, totaling 21.5 billion shekels, is primarily driven by a significant 19% rise in tax revenues during the first quarter of 2025 compared to the same period last year, amounting to 26.7 billion shekels.

Deficit Forecast and Fiscal Challenges

Officials from the Ministry of Finance express optimism that the increase in revenue may prevent a further deepening of the annual deficit. They anticipate that the growth in income will offset an unanticipated surge in defense expenditures due to the extended conflict, although they acknowledge that enhanced revenue alstart will not eliminate the need for additional adjustments to the government’s spending cap. To increase financial allocations for the military operations in Gaza, the Ministry will need to return to the Knesset for a complex legislative process.

The growth forecast for 2026 has also been revised downward from 5.4% to 4.4%, reflecting more moderate expectations for a medium-term economic recovery. This update aligns with the recent downward adjustment made by the Bank of Israel, decreasing its forecast by half a percentage point to 3.5% for 2025 and 4% for 2026.

Future Economic Outlook

Budgetary uncertainty looms in the coming years, with the Ministry of Finance projecting an average annual deficit of approximately 2.8-2.9% from 2026 to 2028, which is considered a “sustainable deficit.” However, meeting expenditure limits will require an estimated average adjustment of about 2.5 billion shekels annually for each year of the fiscal plan. The projected expenditure for 2026 is set at 622 billion shekels, inclusive of 83 billion shekels allocated for interest payments.

The volatility of these forecasts arises from significant uncertainty surrounding the ongoing military situation and its fiscal ramifications. The three-year plan assumes that the conflict will conclude and not extend into the years 2026-2028; however, any significant changes in this regard will impact the fiscal data. Additionally, recommendations from the Nagle Committee regarding increased defense budgets are not included in the current forecasts, which may necessitate further adjustments if implemented.

Conclusion

While the Ministry of Finance emphasizes “fiscal stability resulting from government policy advancements in the recent budget,” it warns of “significant uncertainty” regarding future perspectives. The revised three-year plan will serve as a foundation for government discussions concerning economic policy in the coming years, highlighting the expectation of forthcoming major decisions, particularly in the realm of defense, that may alter the fiscal landscape