Israeli economy grapples with expanding deficit


The Israeli economy is facing challenges due to ongoing conflicts, leading to a deficit of about 3.4% of the GDP by the end of November – equivalent to a substantial NIS 62.3 billion ($16.8b.), NIS 34b. ($9.1b) since the war began. Despite a modest 0.8% growth in November, projections from the Finance Ministry indicate a deepening deficit, reaching 4% by year-end, differing from earlier more optimistic predictions.

Top officials in the Budget Department maintain that the deficit will be 3.7% by year-end, but there’s a NIS 4.5b. difference in assumptions about government spending and revenues. The ongoing war significantly contributes to the deficit increase, with government spending reaching NIS 46.9b. in November, a notable rise from the previous year.

Approximately NIS 3b. of the deficit growth comes from an expanded government budget, with an extra NIS 5.8b. allocated for direct war-related expenses. An additional NIS 2b. is designated for civilian expenditures, including refugee aid. Many expenses are yet to be included in the budget and will only be revealed in December and throughout 2024.

In the same period, November revenues amounted to around NIS 30.3b., indicating a shortfall of about NIS 4.5b. compared to the previous year. This decline, reflective of a trend preceding the Iron Swords war, is aggravated by the conflict, which has curtailed economic activity and lowered tax yields. The decrease in indirect taxes amounts to about NIS 2.9b., and in direct taxes, about NIS 1.3b.

To grasp the magnitude of the decline in tax collection, it’s crucial to consider the real change (adjusted for inflation) between November 2022 and November 2023, reflecting a decrease of approximately 16.5%. This includes a 15% drop in direct taxes and an 18.6% reduction in indirect ones. Income tax from individuals and companies dropped by around 22% in November 2023 compared to the previous year. These are the lowest income levels from property taxes in nearly five years (excluding holiday months).

The direct impact of the war on the deficit is a serious concern, with ongoing conflicts significantly contributing to budgetary imbalances. Heightened government spending on war-related efforts and the consequent decrease in tax revenues paint a bleak picture of the nation’s fiscal health. As the war persists, economic challenges are poised to escalate, necessitating strategic measures to mitigate both immediate and long-term effects on the budget.

New Israeli Shekel bills are seen in front of a downwards-trending graph (illustration) (credit: HADAR YOUAVIAN/FLASH90)

But wait, there’s more

The Israeli economy faces additional challenges, as pointed out by Prof. Dan Ben-David, head of the Shoresh Institution for Socioeconomic Research and an economist at Tel-Aviv University.

The ongoing war, lasting over two months with no clear end in sight, has led to the mobilization of approximately 360,000 reservists, impacting some of the economy’s most productive individuals. These individuals are uncertain about when they can return to work, adding to the economic strain.

Furthermore, “There are between 100,000 to 200,000 refugees within Israel with little or no compensation from a government that has no clue on their exact number and no idea when they’ll be able to return home. Many of them no longer have homes, or even communities, to return to,” he said.

“A normal government would circle the wagons, divert as many of its resources as possible toward the war and emergency efforts while cutting down on as many unnecessary expenditures as possible in order to avoid exacerbating what will, in any event, turn into high budget deficits that will raise our national debt,” Ben-David said, noting that the current government is indeed diverting resources, but primarily to maintain its current budgetary allocations.

“They continue to maintain a government the size of a third of the Knesset with government ministries so dysfunctional that much of their work is being carried out by ad hoc civilian volunteer groups.”

“Never in Israel’s history has there been a greater dissonance between the personal attributes of those leading the country along with the personal attributes of those keeping its economy in the developed world, and those risking (and losing) their lives to keep its prospective annihilators at bay,” he concluded, wryly adding that “Things can only improve after this awful year.”