Treasury: Iran, Gaza fighting won't widen fiscal deficit

Accountant General Yali Rothenberg says the increase in government spending will be almost completely offset by higher revenue from taxes.

Despite a jump of tens of billions of shekels in Israel's defense expenditure to finance the operation in Iran and the expanded fighting in Gaza, "The net influence on the deficit will be negligible to moderate," accountant general Yali Rothenberg believes.

According to the accountant general's forecast, the increase in government spending relative to the budget will be almost completely offset by the strengthening of the revenue flow to the Ministry of Finance from taxes. Because of this, the Ministry of Finance does not plan to increase the rate of debt raising in Israel and abroad to cover the costs of the war.

Rothenberg also believes that the credit rating agencies will respond positively to the geopolitical developments in Israel's security arena after the operation against Iran. This, after having cut Israel's rating several times since October 7.

Israel's fiscal deficit was 5% of GDP at the end of May. The target for the end of in the 2025 budget is a fiscal deficit of 4.9% of GDP. Even if the accountant general's positive forecast is realized, and the figure stabilizes at its current level by the end of 2025, the Ministry of Finance will still be required to open the budget, because while the deficit target is not binding, the spending limit is rigid in law, and the government is prohibited from exceeding it, even if revenues have increased.

"Continuing tension"

"Behind the dialogue with the Ministry of Defense on the 2025 budget, there is a continuing tension between security needs and other vital public needs like transport and education and the need to reduce the deficit to return to fiscal flexibility. Ultimately the politicians must decide on priorities," added Rothenberg when presenting the state's financial statement for 2024.

Currently, the differences between the Ministry of Defense and the Ministry of Finance on the scale of immediate additions for 2025 are still very wide, so it is still difficult to know exactly how much defense spending will increase. The Budget Division, responsible for identifying budgetary sources and negotiating with the IDF, is warning that if talks with the Ministry of Defense do not converge on realistic amounts, they will promote "adjustments" on the revenue side - a euphemism for tax hikes.

But this warning must be qualified. Even within the Budget Division, it is believed that the short schedule for opening the budget, at this late stage of the year, will make it difficult to implement such adjustments. On the expenditure side, the Ministry of Finance is planning an across-the-board flat cut of NIS 700 million in the budgets of government ministries.

Published by Globes, Israel business news - en.globes.co.il - on June 29, 2025.

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