Israel Unveils Austerity Plan to Offset War Costs, Raises Concerns for Economy

Israel’s Finance Minister Bezalel Smotrich has outlined a long-delayed fiscal plan for 2025, outlining a path to reduce the budget deficit while acknowledging the significant costs of the ongoing conflict in Gaza, Bloomberg reports.

The plan, which aims to reduce the fiscal gap to 4% of gross domestic product, will require substantial budgetary adjustments of at least 35 billion shekels ($9.5 billion). To achieve this target, Smotrich announced plans for significant cuts to the public sector, pay freezes for ministers, politicians, and state employees, and a focus on increasing government revenue.

The war in Gaza, which is now in its 11th month, along with tensions with Hezbollah, has significantly increased Israel’s defense spending, straining the economy. The country’s 12-month trailing deficit rose to 8.1% of GDP in July, leading to the government’s first-ever credit rating downgrades.

While Smotrich reiterated the government’s goal of reducing the deficit to 6.6% in 2024, the 2025 target still represents one of the widest gaps Israel has seen this century. The proposed budget is expected to be approved by Israel’s parliament by the end of the year, although economic experts have warned that the deadline is unrealistic given the complex legislative process and the need for further structural work.

Smotrich admitted that the war in Gaza and ongoing clashes with Hezbollah could lead to unexpected expenses, potentially impacting the government’s ability to meet its budget goals for the year. He also said that the finance ministry’s growth projection for 2024 of 1.9% is likely to be lowered soon, with analysts from Citigroup Inc. forecasting a figure of 1.4%.

The announcement of the austerity plan has raised concerns among investors and business leaders, who have warned that the delay in announcing fiscal adjustments could cloud Israel’s economic prospects and increase the risk premium on its assets.

The plan also faces criticism regarding the controversial allocation of political budgets, which have stirred public anger due to their use for religious schools and settlements in the West Bank. Smotrich has stated that these funds should be minimized.

Moving forward, the government plans to focus on supporting the high-tech industry, streamlining the public sector, and combating unreported income. The specifics of these initiatives remain unclear.

Central bank officials have been advocating for fiscal adjustments for months to address the rising defense costs, and Smotrich’s plan represents a step in that direction.