Israel's Ministry of Finance has begun preparing the 2025 budget and has found a deficit of NIS 30 billion. If no cover is found for the shortfall, which will come mainly from tax hikes, the deficit will deepen next year to around 7% of GDP, double the forecast submitted by the Ministry of Finance to the Knesset last February, and about 30% more than the maximum that the Ministry of Finance is preparing for.
In other words 2025 could be another economically lost year, with a deficit as high as in 2024, which will lead to a further worsening of the country's debt-to-product ratio, and probably also its credit rating.
At a meeting this week, Ministry of Finance director general Shlomi Heizler instructed his top officials to form a plan to be presented by the end of the month to Minister of Finance Bezalel Smotrich for a balanced budget with details of revenues.
So far the officials have found NIS 4 billion that can be saved from government spending by cutting coalition funds and closing unnecessary government ministries. Even if it were possible to override opposition within the coalition to these cuts, it would only narrow the deficit by 13%, leaving an extra NIS 26 billion to be found.
This amount would have to be raised by taxes. A hike in VAT from 17% to 18% in 2025 was already approved in the 2024 budget but the Ministry of Finance is now mulling raising VAT by even more, and maybe introducing the 18% rate already this year. The Ministry of Finance is also considering freezing the rise in income tax brackets in 2025, with the Bank of Israel forecasting 2.7% inflation this year. This would hit salaries in the lower income brackets hardest.
The Economic Arrangements Bill, which traditionally includes reforms that encourage economic growth is likely to be thin for 2025. The Ministry of Finance will also introduce more measures to combat black money, which would increase tax collection.
After previous plans to combat economic crime in Arab society were essentially abandoned by the government, the focus will now shift to taxing oligarchs. The details are still unclear, but apparently this is a follow-up phase to the amendment of the "Milchan Law," which was approved by the Knesset last month and canceled the exemption from reporting income and capital outside of Israel granted to returning residents and new immigrants. Also on the agenda are ideas related to taxing foreign companies in Israel, although the Ministry of Finance is wary of any changes that might damage the tech industry.
The main reason for the deficit is the defense budget. Although Prime Minister Benjamin Netanyahu has yet to set up the committee to examine the defense budget, the thinking is that the Ministry of Defense will receive the additional NIS 20-30 billion it is demanding in the 2025 budget, giving the Ministry of Finance no choice but to cut spending and raise revenue.
Published by Globes, Israel business news - en.globes.co.il - on May 9, 2024.
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